Centers for Medicare and Medicaid Services
Internal Control Deficiencies Resulted in Millions of Dollars of Questionable Contract Payments Gao ID: GAO-08-54 November 15, 2007The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) established a voluntary outpatient prescription drug benefit, which is administered by the Centers for Medicare and Medicaid Services (CMS). CMS relies extensively on contractors to help it carry out its basic mission. Congress appropriated to CMS $1 billion for start-up administrative costs to implement provisions of MMA. Because CMS had discretion on how to use the appropriation, Congress asked GAO to determine (1) how CMS used the $1 billion MMA appropriation, (2) whether CMS's contracting practices and related internal controls were adequate to avoid waste and to prevent or detect improper payments, and (3) whether payments to contractors were properly supported as a valid use of government funds. To address objectives two and three above, our review extended beyond contract amounts paid with MMA funds.
CMS expended over 90 percent of the MMA appropriation by the end of December 2006. The majority, about $735 million, was paid to contractors and vendors for a variety of services. For example, because the volume of calls to the 1-800-MEDICARE help line significantly increased with the new outpatient prescription drug benefit, two contractors were paid about $234 million to support the help line. CMS also made payments to other federal agencies for services such as printing and mailing; to state agencies to fund educating the public; for CMS employee payroll and travel costs; and for purchase card transactions to acquire office supplies, equipment, and outreach materials. CMS management has not allocated sufficient resources, both staff and funding, to keep pace with recent increases in contract awards and adequately perform contract and contractor oversight. This operating environment created vulnerabilities in the contracting process. Specifically, CMS did not adequately fulfill critical contractor oversight, such as working with contractors to establish indirect cost rates. Further, certain contracting practices, such as the frequent use of cost reimbursement contracts, increased risks to CMS. After contract award, pervasive internal control deficiencies increased the risk of improper payments. Because CMS did not have clear invoice review guidance, invoice review procedures were often flawed or did not take place. CMS also had not taken steps to ensure contracts were closed within required deadlines and had a backlog of approximately 1,300 contracts as of September 30, 2007. GAO identified numerous questionable payments totaling nearly $90 million. These payments were for costs not compliant with contract terms, which could be potentially improper; costs for which we could not obtain adequate support to determine whether the costs were allowable; and potential waste caused by risks in CMS's contracting practices. Importantly, in some cases, because we were not able to determine whether or to what extent the costs were allowable, some of the questioned amounts may relate to allowable costs that are not recoverable. The table below summarizes the questionable payments GAO identified.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-08-54, Centers for Medicare and Medicaid Services: Internal Control Deficiencies Resulted in Millions of Dollars of Questionable Contract Payments
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
November 2007:
Centers For Medicare And Medicaid Services:
Internal Control Deficiencies Resulted in Millions of Dollars of
Questionable Contract Payments:
GAO-08-54:
GAO Highlights:
Highlights of GAO-08-54, a report to congressional requesters.
Why GAO Did This Study:
The Medicare Prescription Drug, Improvement, and Modernization Act of
2003 (MMA) established a voluntary outpatient prescription drug
benefit, which is administered by the Centers for Medicare and Medicaid
Services (CMS). CMS relies extensively on contractors to help it carry
out its basic mission. Congress appropriated to CMS $1 billion for
start-up administrative costs to implement provisions of MMA. Because
CMS had discretion on how to use the appropriation, Congress asked GAO
to determine (1) how CMS used the $1 billion MMA appropriation, (2)
whether CMS‘s contracting practices and related internal controls were
adequate to avoid waste and to prevent or detect improper payments, and
(3) whether payments to contractors were properly supported as a valid
use of government funds. To address objectives two and three above, our
review extended beyond contract amounts paid with MMA funds.
What GAO Found:
CMS expended over 90 percent of the MMA appropriation by the end of
December 2006. The majority, about $735 million, was paid to
contractors and vendors for a variety of services. For example, because
the volume of calls to the 1-800-MEDICARE help line significantly
increased with the new outpatient prescription drug benefit, two
contractors were paid about $234 million to support the help line. CMS
also made payments to other federal agencies for services such as
printing and mailing; to state agencies to fund educating the public;
for CMS employee payroll and travel costs; and for purchase card
transactions to acquire office supplies, equipment, and outreach
materials.
CMS management has not allocated sufficient resources, both staff and
funding, to keep pace with recent increases in contract awards and
adequately perform contract and contractor oversight. This operating
environment created vulnerabilities in the contracting process.
Specifically, CMS did not adequately fulfill critical contractor
oversight, such as working with contractors to establish indirect cost
rates. Further, certain contracting practices, such as the frequent use
of cost reimbursement contracts, increased risks to CMS. After contract
award, pervasive internal control deficiencies increased the risk of
improper payments. Because CMS did not have clear invoice review
guidance, invoice review procedures were often flawed or did not take
place. CMS also had not taken steps to ensure contracts were closed
within required deadlines and had a backlog of approximately 1,300
contracts as of September 30, 2007.
GAO identified numerous questionable payments totaling nearly $90
million. These payments were for costs not compliant with contract
terms, which could be potentially improper; costs for which we could
not obtain adequate support to determine whether the costs were
allowable; and potential waste caused by risks in CMS‘s contracting
practices. Importantly, in some cases, because we were not able to
determine whether or to what extent the costs were allowable, some of
the questioned amounts may relate to allowable costs that are not
recoverable. The table below summarizes the questionable payments GAO
identified.
Summary of Questionable Payments (Dollars in millions):
Type of questionable payment: Costs not compliant with contract terms
and regulations;
Amount: $25.5.
Type of questionable payment: Unsupported contractor costs;
Amount: $62.7.
Type of questionable payment: Potential waste;
Amount: $6.6.
Type of questionable payment: Less overlapping amounts[A];
Amount: ($5.0).
Type of questionable payment: Total;
Amount: $88.8.
Source: GAO analysis of contractor invoices and data.
[A] In certain instances, a portion of a questionable payment may fall
into more than one category (i.e., a payment may be both potential
waste and not compliant with contract terms). Therefore, to avoid
double counting questionable payment amounts, we reduced the gross
questionable payment amount by the overlapping amount ($5.0 million).
[End of table]
What GAO Recommends:
GAO makes nine recommendations to improve internal control and
accountability in the contracting process and related payments to
contractors. In written comments on a draft of this report, CMS stated
that it would take action on each of our recommendations and described
some steps taken and others planned to address our recommendations. At
the same time, CMS disagreed with some of our findings. We continue to
believe that our findings fully support our nine recommendations.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.GAO-08-54]. For more information, contact
Jeanette Franzel at (202) 512-9471 or franzelj@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
CMS Paid Most of the $1 Billion of MMA Funds to Contractors:
Internal Control Deficiencies over Contracting and Contract Payments
Increased the Risk of Waste and Improper Payments:
CMS Made Nearly $90 Million of Questionable Payments to Contractors:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Questionable Payments to Contractors:
Appendix II: Scope and Methodology:
Appendix III: Comments from the Centers for Medicare and Medicaid
Services:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Payments to Major Contractors and Vendors from January 2004
through December 2006:
Table 2: CMS's Cognizant Federal Agency Responsibilities:
Table 3: Summary of Questionable Payments:
Table 4: Questionable Payments by Contractor:
Table 5: Contracts and Amounts Included in Our Review of CMS Payments:
Figures:
Figure 1: Recipients of CMS's Payments from MMA Funds from January 2004
through December 2006:
Figure 2: Activities Provided by Contractors and Vendors:
Figure 3: CMS Contract Awards and Oversight Resources from Fiscal Years
1997 through 2006:
Abbreviations:
BAH: Booz Allen Hamilton:
CAS: Cost Accounting Standards:
CMS: Centers for Medicare and Medicaid Services:
DCAA: Defense Contract Audit Agency:
DOD: Department of Defense:
FAR: Federal Acquisition Regulation:
FTE: full time equivalents:
GSA: General Services Administration:
HHS: Department of Health and Human Services:
HHSAR: Health and Human Services Acquisition Regulations:
IBM: International Business Machines:
IFMC: Iowa Foundation for Medical Care:
IR&D: independent research and development:
IT: information technology:
MMA: Medicare Prescription Drug, Improvement, and Modernization Act of
2003:
NIH: National Institutes of Health:
OAGM: Office of Acquisition and Grants Management:
OFM: Office of Financial Management:
OIG: Office of Inspector General:
SBA: Small Business Administration:
T&M: time and materials:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
November 15, 2007:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
In the most significant change to the Medicare program since its
inception, the Medicare Prescription Drug, Improvement, and
Modernization Act of 2003[Footnote 1] (MMA) established a voluntary
outpatient prescription drug benefit, known as the Part D benefit. This
benefit, which became available in January 2006, is intended to help
seniors and persons with disabilities pay for outpatient prescription
drugs. The Centers for Medicare and Medicaid Services (CMS) is the
agency within the Department of Health and Human Services (HHS) that
administers the Medicare program and Part D benefit. CMS relies
extensively on contractors to carry out its basic mission. For example,
the contractors that process and administer medical claims have played
a critical role in serving both Medicare beneficiaries and health care
providers. During fiscal year 2006, CMS awarded contracts valued at
$3.8 billion.
Congress appropriated to CMS $1 billion for start-up administrative
costs to implement MMA provisions. These MMA funds were available for
obligation[Footnote 2] through September 2006. Because CMS was granted
broad discretion on how to use the appropriation, you asked us to
determine (1) how CMS used the $1 billion MMA appropriation (2) whether
CMS's contracting practices and related internal controls were adequate
to avoid waste[Footnote 3] and to prevent or detect improper
payments,[Footnote 4] and (3) whether payments to contractors were
properly supported as a valid use of government funds.
To address these objectives, we analyzed CMS obligation information and
disbursement information from January 2004 through December 2006;
discussed this information with CMS officials; and assessed contracts,
interagency agreements, and related supporting documentation,
including statements of work, vendor invoices, and contract files. We
also interviewed CMS officials about their contractor oversight
responsibilities and analyzed relevant CMS policies, procedures, and
training. We used GAO's standards for internal control[Footnote 5] and
Federal Acquisition Regulation (FAR)[Footnote 6] requirements as a
basis to assess CMS's contracting practices and related internal
controls. We selected contractors and contracts[Footnote 7] to test
based on amounts paid with MMA funds and other risk factors. We
performed data mining[Footnote 8] and forensic auditing[Footnote 9]
techniques to select specific contract transactions for detailed
testing. Specifically, for these selected transactions, we analyzed
additional supporting documentation obtained from contractors and
discussed billed amounts with contractor officials. While we identified
instances of questionable payments,[Footnote 10] our work was not
designed to identify all questionable payments or to estimate their
extent. Because CMS funded some invoices with funding sources in
addition to MMA, the questionable payments we identified may not be
solely associated with the MMA appropriation.
Appendix II provides additional details of our scope and methodology.
We conducted this performance audit in accordance with generally
accepted government auditing standards. Those standards require that we
plan and perform the audit to obtain sufficient, appropriate evidence
to provide a reasonable basis for our findings and conclusions based on
our audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit
objectives. We conducted our audit work in Washington, D.C. and
Baltimore, Maryland from March 2006 through September 2007.
Results in Brief:
Congress appropriated to CMS $1 billion for start-up administrative
costs to implement MMA provisions. CMS obligated all of the funding
made available by MMA and expended over 90 percent of it by the end of
December 2006. The majority, about $735 million, was paid to
contractors and vendors for a variety of services, including
information technology (IT), support for the 1-800-MEDICARE help line,
and outreach and education for the prescription drug benefit. CMS also
made payments to other federal agencies for services such as printing
and mailing; to state agencies to help fund educating the public about
the new prescription drug benefit; for CMS employee payroll and travel
costs; and for purchase card transactions to acquire office supplies,
equipment, and outreach materials.
CMS management has not allocated sufficient resources, both staff and
funding, to keep pace with recent increases in contract awards and
adequately perform contract and contractor oversight. This operating
environment created vulnerabilities in the contracting process.
Specifically, CMS did not fulfill critical contractor oversight
responsibilities, such as reviewing contractors' indirect cost rate
information and assessing the adequacy of the contractors' accounting
systems, thereby increasing risks not only to CMS but to other federal
agencies that may use the same contractors. Additionally, risks in
CMS's contracting practices made CMS vulnerable to waste. For example,
CMS did not always benefit from the effects of competition when
awarding contracts. Further, CMS frequently used a contract type--cost
reimbursement--under which the government assumes most of the cost
risk. In some cases, this contract type was used contrary to FAR
requirements. After contract award, pervasive internal control
deficiencies in the contracting process increased the risk of improper
payments. For example, CMS often used flawed procedures to review and
approve invoices in part because policies, procedures, and training
provided inadequate guidance to key staff. Meanwhile, other CMS
procedures allowed for the payment of an invoice whether or not the
invoice was reviewed and approved. Additionally, CMS had not taken
steps to ensure contracts were closed within required deadlines and had
a backlog of approximately 1,300 contracts needing closeout as of
September 30, 2007.
We identified numerous questionable payments totaling nearly $90
million that represent potentially improper, unsubstantiated, or
wasteful payments. For example, we found payments for costs that did
not comply with the terms of the contract or applicable regulation,
such as costs for unapproved labor categories, costs exceeding contract
ceiling amounts, and travel costs in excess of allowable limits. In
other cases, we were unable to obtain adequate documentation, such as
vendor invoices or time sheets, to support costs billed. In addition,
we identified payments for which risks in CMS's contracting practices
resulted in potential waste. In some cases, due to the facts and
circumstances involved, we were unable to determine whether or to what
extent the costs were allowable, reasonable, and allocable. As a
result, some portion of the total amount of questionable payments we
identified ultimately may be determined by CMS to be allowable and
therefore not recoverable from the contractor. Given CMS's poor control
environment and the fact that our work was not designed to identify all
questionable payments made by CMS or to estimate their extent, other
questionable payments may have been made.
To improve internal control and accountability in the contracting
process and related contract payments, we are making nine
recommendations to the Administrator of CMS to develop additional
policies and procedures, training on the invoice review process, and a
plan to reduce the backlog of contracts awaiting closeout.
In written comments on a draft of this report, CMS stated that it would
take action on each of our recommendations and described steps taken
and others planned to address our recommendations. At the same time,
CMS disagreed with some of our findings. Specifically, CMS disagreed
with the questionable payments identified in our report. However, CMS
also stated that it has not yet performed audits of the contracts in
question. Our report clearly states that in some cases, due to the
facts and circumstances involved, we were unable to determine whether
or to what extent the costs we questioned were allowable, reasonable,
and allocable. As a result, some portion of the total amount of
questionable payments we identified ultimately may be determined by CMS
to be allowable. However, we also state that given CMS's poor control
environment and the fact that our work was not designed to identify all
questionable payments made by CMS or to estimate their extent, other
questionable payments may have been made. We continue to believe that
our findings fully support the nine recommendations we make for
improved control and accountability over the contracting process and
related payments. However, we have considered CMS's comments and have
incorporated, as appropriate, clarifying language in our report.
Our responses to CMS's comments are provided in the agency comments
section of this report and in appendix III, immediately following the
reprinted CMS comments.
Background:
Contracts of federal executive agencies that use appropriated funds are
administered in accordance with laws,[Footnote 11] FAR, agency-specific
FAR supplements, the Cost Accounting Standards (CAS),[Footnote 12] and
the terms of the contract. HHS' FAR supplement, the Health and Human
Services Acquisition Regulations (HHSAR),[Footnote 13] contains
additional requirements not found in the FAR, such as disallowing
payments to contractors for independent research and development
costs.[Footnote 14] The purpose of CAS is to help achieve uniformity
and consistency in contractors' cost accounting practices and provide
rules for estimating, accumulating, and reporting costs under
government contracts and subcontracts. For example, CAS requires
certain contractors to prepare a disclosure statement that describes
their accounting practices and requires that similar costs be treated
in the same manner. Contractor compliance with CAS is monitored by a
contractor's cognizant federal agency.[Footnote 15]
The cognizant federal agency is usually the agency with the largest
dollar amount of negotiated contracts, including options, with the
contractor. To help ensure continuity and ease of administration, FAR
recommends that once an agency assumes cognizant federal agency
responsibilities for a contractor, it generally retains cognizant
status for at least 5 years. If, at the end of the 5-year period,
another agency has the largest dollar amount of negotiated contracts
including options, the two agencies coordinate and determine which one
will assume the responsibilities. In addition to monitoring CAS
compliance, the cognizant federal agency is responsible for determining
if the contractor's billing and accounting systems are adequate to
record and bill costs in accordance with FAR.[Footnote 16] The
cognizant federal agency also establishes provisional indirect cost
rates[Footnote 17] based on an audit of information provided by the
contractors that contractors use to estimate indirect costs on their
invoices. The cognizant federal agency also establishes final indirect
cost rates based on an audit of actual costs of the contractor during
the year. The final indirect cost rates are used to adjust contractor
billings (based on provisional indirect cost rates) for actual costs
and may result in an additional cost or savings to the government. The
final indirect cost rates established by the cognizant federal agency
are utilized by agencies dealing with the contractor. Because other
agencies rely on this cost information and oversight, it is
particularly important that the cognizant federal agency fulfills its
responsibilities.
MMA significantly changed Medicare law covering CMS's contracting for
Medicare claims administration services. 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, which CMS is required to complete by October 2011,
will fundamentally change Medicare claims administration contracting
practices. Specifically, MMA requires CMS to use competitive procedures
to select Medicare Administrative Contractors (formerly referred to as
claims administration contractors) and to follow FAR except where
specific MMA provisions differ. Prior to MMA, CMS was generally exempt
from these requirements for its claims administration contractors.
According to data provided by CMS's Office of Acquisition and Grants
Management (OAGM), during fiscal year 2006 CMS awarded contracts valued
at about $3.8 billion. Of that amount, about half represented Medicare
claims administration contracts that were not previously subject to
FAR. The other half was already covered by FAR and is the category of
contract primarily covered by this report.[Footnote 18]
Contract Life Cycle, Contract Types, and Contract Risks:
The contract life cycle includes many acquisition and administrative
activities. Prior to award, an agency identifies a need; develops a
requirements package; determines the method of contracting; solicits
and evaluates bids or proposals; and ultimately awards a contract.
After contract award, the agency performs contract administration and
contract closeout. Contract administration involves the agency
monitoring the contractor's progress and processing payments to the
contractor. The contract closeout process involves verification that
the goods or services were provided and that administrative matters are
completed. Also during contract closeout, a contract audit of costs
billed to the government may be performed and the agency processes the
final invoice with an adjustment for any over-or underpayments.
Agencies may choose among different contract types to acquire goods and
services. This choice is the principal means that agencies have for
allocating risk between the government and the contractor. Contract
types can be grouped into three broad categories: fixed price
contracts, cost reimbursement contracts, and time and materials (T&M)
contracts. As discussed below, these three types of contracts place
different levels of risk on the government, which the government
generally manages through oversight.
* For fixed price contracts, the government agrees to pay a set price
for goods or services regardless of the actual cost to the contractor.
A fixed price contract is ordinarily in the government's interest when
a sound basis for pricing exists as the contractor assumes the risk for
cost overruns.
* Under cost reimbursement contracts, the government agrees to pay
those costs of the contractor that are allowable, reasonable, and
allocable to the contract. The government assumes most of the cost risk
because the contractor is only required to provide its best effort to
meet contract objectives within the estimated cost. If this cannot be
done, the government would provide additional funds to complete the
effort, fail to provide additional funds, or terminate the contract.
The FAR requires agencies to mitigate risks through adequate government
surveillance (oversight) during the performance of the contract. In
addition, the contractor must have adequate accounting systems to
record and bill costs.
* For T&M contracts, the government agrees to pay fixed per-hour labor
rates and to reimburse other costs directly related to the contract,
such as materials, equipment, or travel, based on cost. Like cost
reimbursement contracts, the government assumes the cost risk because
the contractor is only required to make a good faith effort to meet the
government's needs within a ceiling price. In addition, since these
contracts provide no positive profit incentive for the contractor to
control costs or use labor efficiently, the government must conduct
appropriate surveillance of contractor performance to ensure efficient
methods and effective cost controls are being used.
Roles in CMS Contracting Activities:
At CMS, OAGM manages contracting activities and is responsible for,
among other things, (1) developing policy and procedures for use by
acquisition staff; (2) coordinating and conducting acquisition
training; and (3) providing cost/price analyses and evaluations
required for the review, negotiation, award, administration, and
closeout of contracts. Multiple key players work together to monitor
different aspects of contractor performance and execute preaward and
postaward contract oversight. All but one of the players described
below are centralized in OAGM. Project officers are assigned from CMS
program offices.
* Contracting officers are responsible for ensuring performance of all
necessary actions for effective contracting, overseeing contractor
compliance with the terms of the contract, and safeguarding the
interests of the government in its contractual relationships. The
contracting officer is authorized to enter into, modify, and terminate
contracts.
* Contracting specialists represent and assist the contracting officers
with the contractor, but are generally not authorized to commit or bind
the government. Additionally, the contracting specialist assists with
the invoice review process.
* The cost/price team serves as an in-house consultant to others
involved in the contracting process at CMS. By request, the team, which
consists of four contract auditors, provides support for contract
administration including reviewing cost proposals, consultations about
the allowability of costs billed on invoices, and assistance during
contract closeout.
* Project officers serve as the contracting officer's technical
representative designated to monitor the contractor's progress,
including the surveillance and assessment of performance and compliance
with project objectives. The project officer also reviews invoices and
conducts periodic analyses of contractor performance and cost data.
Within HHS, its cognizant federal agency oversight responsibilities are
divided between different agencies and offices. In 2002, HHS designated
the National Institutes of Health (NIH) responsible for establishing
provisional and final indirect cost rates when requested by other HHS
agencies to perform such duties. Other responsibilities, such as
monitoring a contractor's compliance with CAS, belonged to the
individual HHS agency or office, such as CMS, that primarily works with
the contractor. Because certain cognizant federal agency
responsibilities at HHS were assigned to CMS, we refer to CMS as the
cognizant federal agency. At CMS, the cost/price team was assigned
these other cognizant federal agency responsibilities. CMS could also
pay another agency to assist it with the necessary oversight. For
example, within the Department of Defense (DOD), the Defense Contract
Audit Agency (DCAA) performs contract audits, including those required
to fulfill DOD's responsibilities as a cognizant federal agency. When
requested and for a fee, DCAA will perform contract audits for other
agencies.
CMS Paid Most of the $1 Billion of MMA Funds to Contractors:
Congress appropriated to CMS $1 billion to fund start-up administrative
costs to implement MMA provisions. CMS received $975 million, and
Congress transferred the remaining $25 million to the HHS Office of the
Inspector General (OIG) for oversight of the Part D program, including
detecting and preventing fraud and abuse and the design and maintenance
of a drug pricing database.[Footnote 19] CMS's $975 million
appropriation was available for obligation through September 2006.
According to CMS financial data, CMS obligated $974.6 million and, from
January 2004 through December 2006, expended over $908
million,[Footnote 20] of which about $735 million or 81 percent was
paid to contractors and vendors for a variety of services. Payments
were also made for services provided by other federal and state
agencies, for CMS employee-related expenses, and for purchase card
transactions. Figure 1 summarizes the amounts CMS paid to various
recipients.
Figure 1: Recipients of CMS's Payments from MMA Funds from January 2004
through December 2006:
[See PDF for image]
This figure is a pie-chart illustrating the amount and percentage of
the total for recipients of CMS's payments from MMA funds from January
2004 through December 2006. The following data is depicted:
Contractors and vendors: 81.0% ($735.4 million);
Federal agencies: 11.6% ($105.0 million);
Employee-related expenses: 4.6% ($42.1 million);
State agencies: 2.6% ($23.8 million);
Purchase card payments: 0.2% ($2.0 million).
Source: GAO analysis of CMS data.
[End of figure]
Payments to Contractors and Vendors:
CMS paid $735.4 million to over 250 different contractors and vendors.
Of this amount, CMS paid about $521.2 million to 16 major contractors,
$26.7 million to several Medicare contractors serving as fiscal
intermediaries[Footnote 21] and carriers[Footnote 22] that administer
Medicare benefits on behalf of CMS, and an additional $187 million to
over 200 other contractors and vendors. Our assessment of CMS's
contracting practices and related internal controls was based primarily
on specific controls over the contracts funded with MMA money for the
16 major contractors listed in table 1.
Table 1: Payments to Major Contractors and Vendors from January 2004
through December 2006 (Dollars in millions):
Contractors/vendors: NCS Pearson, Inc.;
Amount: $153.9;
Activity provided[A]: 1-800-Medicare help line.
Contractors/vendors: Palmetto GBA;
Amount: 81.0;
Activity provided[A]: 1-800-Medicare help line[B].
Contractors/vendors: Lockheed Martin Corporation;
Amount: 54.3;
Activity provided[A]: Information technology.
Contractors/vendors: Ketchum, Inc.;
Amount: 47.3;
Activity provided[A]: Outreach/education.
Contractors/vendors: CGI Federal;
Amount: 25.7;
Activity provided[A]: Information technology.
Contractors/vendors: Computer Sciences Corporation;
Amount: 24.8;
Activity provided[A]: Information technology.
Contractors/vendors: ViPS;
Amount: 24.1;
Activity provided[A]: Information technology.
Contractors/vendors: Booz Allen Hamilton, Inc.;
Amount: 19.4;
Activity provided[A]: Information technology and program support[B].
Contractors/vendors: Government Micro Resources, Inc.;
Amount: 18.0;
Activity provided[A]: Information technology.
Northrop Grumman Corporation; Amount: 17.2; [Empty]; Activity
provided[A]: Information technology.
Contractors/vendors: Iowa Foundation for Medical Care;
Amount: 13.7;
Activity provided[A]: Information technology[B].
Contractors/vendors: International Business Machines, Corp.;
Amount: 10.2;
Activity provided[A]: Information technology.
Contractors/vendors: Z-Tech Corporation;
Amount: 10.2;
Activity provided[A]: Information technology.
Contractors/vendors: TrailBlazer Health Enterprises, LLC;
Amount: 7.4;
Activity provided[A]: Information technology and outreach/education.
Contractors/vendors: BearingPoint;
Amount: 7.3;
Activity provided[A]: Outreach/education and program support[B].
Contractors/vendors: Maximus, Inc.;
Amount: 6.7;
Activity provided[A]: Information technology[B].
Contractors/vendors: Medicare fiscal intermediaries and carriers[C];
Amount: 26.7;
Activity provided[A]: Outreach/education.
Contractors/vendors: Other[D];
Amount: 187.5;
Activity provided[A]: Various goods and services.
Contractors/vendors: Total;
Amount: $735.4.
Source: GAO analysis of CMS data.
[A] We analyzed supporting documentation such as the statements of work
for contracts that received at least $1 million of MMA funding. Based
upon this information, we categorized CMS expenditures into various
types of activities.
[B] Because we did not categorize contracts or invoices receiving less
than $1 million of MMA funds, this contractor may have performed other
activities not specifically noted here.
[C] These contractors, such as Blue Cross Blue Shield, administer
Medicare benefits on behalf of CMS.
[D] "Other" represents amounts paid to over 200 different contractors
and vendors that were not included in our assessment of CMS's internal
controls over contractor payments.
[End of table]
Based on our analysis of contracts and invoices paid with MMA funds,
figure 2 summarizes the types of activities provided by contractors and
vendors such as information technology, the 1-800-Medicare help line,
outreach/education, program support, and program integrity.
Figure 2: Activities Provided by Contractors and Vendors:
[See PDF for image]
This figure is a combination of a pie-chart and horizontal bar graph
depicting activities provided by contractors and vendors. The pie-chart
represents the same data presented in Figure 1 (Recipients of CMS's
Payments from MMA Funds from January 2004 through December 2006). The
bar graph provides a breakdown of the 81.0% ($735.4 million) paid to
contractors and vendors as follows:
Information technology: $244.0 million (33.2%);
1-800-Medicare help line: $234.4 million (31.9%);
Outreach/education: $98.9 million (13.4%);
Program support: $61.4 million (8.4%);
Program integrity[A]: $14.3 million (1.9%);
Not categorized[B]: $82.4 million (11.2%).
Source: GAO analysis of CMS data.
Note: To categorize payments to contractors by activity, we analyzed
supporting documentation such as the statements of work for contracts
that received at least $1 million of MMA funding. Because we did not
categorize contracts or invoices receiving less than $1 million of MMA
funds, the amounts reported for each activity could be higher.
[A] "Program integrity" represents amounts paid to contractors and
vendors for activities such as antifraud and abuse efforts related to
prescription drug benefits.
[B] "Not categorized" represents amounts paid to over 200 contractors
and vendors whose total disbursements per contract or invoice were less
than $1 million or were not included in our detailed review of selected
contractors.
[End of figure]
* Information technology: CMS paid $244.0 million for a variety of
information technology services including new hardware and software,
updates to existing systems, and the development of new systems. For
example, CMS used MMA funds to modify its existing contract with CGI
Federal (CGI) to update the system that handles Medicare claims appeals
so that the system could also handle prescription drug claims. CMS also
used MMA funds to modify its contract with Computer Sciences
Corporation for the redesign of the beneficiary enrollment and payment
system so that the system could also handle prescription drug
beneficiaries. CMS also contracted with Iowa Foundation for Medical
Care (IFMC) to develop a system to facilitate studies of chronic
condition care, as specifically required by MMA.
* 1-800-Medicare help line: CMS paid $234.4 million for the operation
of the 1-800-Medicare help line, a CMS-administered help line used to
answer beneficiaries' questions about Medicare eligibility,
enrollment, and benefits.[Footnote 23] Because the help line's call
volume significantly increased with the anticipation of the new
prescription drug benefit,[Footnote 24] CMS used MMA funds to expand
help line operations and fund a portion of help line costs. CMS
contracted with both NCS Pearson (Pearson) and Palmetto GBA (Palmetto)
for help line operations.
* Outreach/education: CMS paid $98.9 million for a variety of outreach
and education activities, including $67.3 million to inform
beneficiaries and their caregivers about the changes to Medicare
benefits and $31.6 million to meet the information and education needs
of Medicare providers. For example, CMS paid Ketchum, a public
relations and marketing firm, $47.3 million to provide outreach and
education to the public. Ketchum assisted with a number of initiatives,
including a nationwide bus tour, which traveled to targeted cities
across America to promote key messages regarding Medicare prescription
drug coverage. To further the television advertising campaign, Ketchum
facilitated a number of media buys (the buying of advertising space)
for commercials to inform the public about the new prescription drug
benefit. CMS paid $31.6 million to Medicare contractors serving as
fiscal intermediaries and carriers that administer Medicare benefits on
behalf of CMS. These contractors, such as Blue Cross Blue Shield,
assisted with provider customer service as required by MMA to meet the
information and education needs of providers.
* Program support: CMS paid $61.4 million for program support
activities to assist with the implementation of the changes to the
Medicare program. For example, CMS contracted with Booz Allen Hamilton
(BAH) to perform an analysis of the prescription drug industry, review
MMA legislative requirements, and develop application requirements for
the prescription drug plans. CMS also contracted with BAH to support
the development of the statements of work for the 1-800-MEDICARE help
line contracts, including assisting CMS with monitoring and oversight
of the contracts.
* Program integrity: CMS paid $14.3 million for program integrity
(antifraud and abuse) activities. For example, CMS paid one contractor
$810,000 to assist CMS as one of the Medicare Drug Integrity
Contractors. These contractors assist CMS in antifraud and abuse
efforts related to the prescription drug benefits. Other examples of
program integrity activities include oversight of the prescription drug
card and coordination of benefit payments to prevent mistaken payment
of Medicare claims.
Payments to Other Recipients:
In addition to the $735.4 million that CMS paid to contractors and
vendors, based upon information in CMS's disbursement data and
descriptions in interagency agreements and on invoices, we determined
that CMS also made payments to other federal agencies, for employee-
related costs, to state agencies, and for purchase card transactions.
* Payments to federal agencies: CMS paid $105.0 million to other
federal agencies. These payments included $27.5 million to the U.S.
Postal Service for mailing services; $26.2 million to the Government
Printing Office for printing services; $5.8 million to the Office of
Personnel Management for various services, including the development of
training courses; and about $19 million to other HHS divisions for
human resources, legal, and other services. CMS also paid about $24
million to the General Services Administration (GSA) for services
including telephone and network services, building renovations, and
renovating a leased facility to include a new training center and
additional office space.
* Payments for CMS employee-related costs: CMS paid $42.1 million for
employee-related costs, including $38.2 million for payroll costs and
$3.9 million for travel costs. The payroll costs covered about 500 new
employees hired in response to MMA and did not include payroll costs
for existing CMS employees working on MMA. While these new employees
were hired to work in divisions throughout CMS and in various regions
of the country, the largest group of employees, 174, was hired to work
in CMS's Center for Beneficiary Choices, which is responsible for
operations related to the prescription drug plans.
* Payments to state agencies: CMS paid $23.8 million to state agencies
as grants under the State Health Insurance Assistance Program. Under
the program (which operates in all 50 states, the District of Columbia,
the Virgin Islands, Puerto Rico, and Guam) the agencies provide
advisory services to Medicare-eligible individuals and their
caregivers. CMS relied on these state agencies to play a significant
role in providing counseling and education services on the changes to
Medicare, including the new prescription drug benefit.
* Payments using purchase cards: CMS paid $2.0 million using purchase
cards to acquire office supplies, outreach materials, and information
technology equipment. An example of outreach materials was $148,391
that CMS paid for 25,000 paperweights to be distributed at MMA outreach
events, such as during the nationwide bus tour. CMS also made a number
of audio and video equipment purchases for its television studio.
Purchase cards were also used to pay for training such as training for
MMA new hires, computer training, and preretirement training.
Internal Control Deficiencies over Contracting and Contract Payments
Increased the Risk of Waste and Improper Payments:
The CMS operating environment created vulnerabilities in the
contracting process and increased the risk of waste and improper
payments. Over the past several years, resources allocated to contract
oversight at CMS have not kept pace with the dramatic increase in
contract awards. Additionally, CMS did not allocate adequate funding
for contract audits and other contractor oversight activities essential
to effectively fulfilling its critical cognizant federal agency
responsibilities. Further, risks in CMS's contracting practices made
CMS vulnerable to waste. For example, CMS did not always benefit from
the effects of competition when awarding contracts. In addition, CMS
frequently used a contract type--cost reimbursement--under which the
government assumes most of the cost risk. In some cases, this contract
type was used by CMS contrary to FAR requirements. In addition, CMS's
approval of certain subcontractor agreements may have increased the
costs to obtain services.
CMS often applied flawed procedures to review and approve invoices. The
flawed procedures were caused, in part, by pervasive internal control
deficiencies, such as a lack of policies and procedures that provide
sufficient guidance for reviewing invoices and that require adequate
supporting documentation for invoices that would enable a review.
Additionally, CMS did not sufficiently train its key staff in
appropriate invoice review techniques, including identifying risks to
the government based on contract type. Further, CMS's payment process,
called negative certification, did not provide incentive for staff to
review invoices, as payments would be made without a certification of
review. Finally, CMS did not closeout contracts within time frames set
by FAR. With only one OAGM contracting officer tasked with closing
contracts, CMS has accumulated approximately 1,300 contracts with a
total contract value of about $3 billion needing closeout as of
September 30, 2007.
CMS's Operating Environment Created Vulnerabilities in the Contracting
Process:
Over the past several years, CMS resources allocated to contract
oversight have not kept pace with CMS's increase in contract awards.
Additionally, CMS did not allocate sufficient funding for contract
audits and other critical contractor oversight activities to fulfill
its cognizant federal agency responsibilities. These contractor
oversight responsibilities include establishing indirect cost rates
with the contractor and verifying that the contractor has the necessary
systems and processes in place to accurately bill the government.
Moreover, risks in certain contracting practices related to
noncompetitive contracts, cost reimbursement contracts, and
subcontractor agreements made CMS vulnerable to waste.
Emphasis on Contract Oversight Did Not Keep Pace with the Increase in
Contract Awards:
When an organization places sufficient emphasis on accountability or
dedicates sufficient management attention to systemic problems, it
reduces risk and potential vulnerabilities in operating activities. An
organization's control environment, that is, management's overall
approach toward oversight and accountability including a supportive
attitude towards internal control, provides discipline and structure
that influences the way the agency conducts its business. As stated in
GAO's standards for internal control, a strong control environment is
the foundation for all other elements of internal control. From fiscal
year 1997 to 2006, as shown in figure 3, CMS contracting has
dramatically increased; however, contract oversight resources have
remained fairly constant. Specifically, contract awards have increased
from about $1.9 billion in 1997 to about $3.8 billion in 2006, an
increase of 103 percent, while oversight resources increased from 79
full time equivalents (FTE) in 1997 to 88 in 2006, an increase of about
11 percent. This trend presents a major challenge to contracting award
and administration personnel who must deal with a significantly
increased workload without additional support and resources.
Figure 3: CMS Contract Awards and Oversight Resources from Fiscal Years
1997 through 2006:
[See PDF for image]
This figure contains two line graphs depicting CMS Contract Awards and
Oversight Resources from Fiscal Years 1997 through 2006.
The first graph represents total dollars awarded. From fiscal year 1997
through 2006, the total contract amount awarded increased from $1.9
billion to $3.8 billion, reflecting a significant increase in the non-
Medicare contract total. The vertical axis of the graph represents
dollars in billions from 0 to 4.0. The horizontal axis of the graph
represents fiscal years 1997 through 2006. Lines represent both
Medicare contracts and non-Medicare contracts, with a combined total of
$1.9 billion indicated for 1997 and a combined total of $3.8 billion
indicated for 2006.
The second graph represents percentage change in contract awards and
oversight. Since fiscal year 1997, annual contract awards increased by
103.0% by fiscal year 2006, while corresponding oversight FTE resources
only increase 11.4% by fiscal year 2006. The vertical axis of the graph
represents percentage change since 1997 from -20 to +120. The
horizontal axis of the graph represents fiscal years 1997 through 2006.
Lines represent contract awards and full time equivalents (FTEs), with
contract awards indicated in 2006 as +103.0% and FTEs indicated in 2006
as +11.4%.
Source: GAO analysis of CMS data.
[End of figure]
Inadequate Fulfillment of Cognizant Federal Agency Responsibilities:
As the cognizant federal agency, CMS was responsible for ensuring that
certain critical contractor oversight was performed, including
establishing provisional and final indirect cost rates,[Footnote 25]
assessing the adequacy of accounting systems,[Footnote 26] and
monitoring compliance with CAS.[Footnote 27] CMS did not have
sufficient procedures in place to ensure its cognizant federal agency
responsibilities were fulfilled, to readily know the contractors it was
responsible for as the cognizant federal agency, or to readily know
which contractors were subject to CAS, which would require additional
oversight to be performed.
We requested a listing of contractors for which CMS was the cognizant
federal agency to determine whether the oversight activities were
performed for the contractors in our review. However, because of
missing and conflicting data in the information provided by CMS, we
independently examined the contract files and spoke with contractors,
NIH, DCAA, and CMS officials to determine that at the end of fiscal
year 2006, CMS was the cognizant federal agency for 8 of the 16
contractors[Footnote 28] in our review. The contracts in our review for
these 8 contractors had a total value of nearly $1 billion as of August
2007.[Footnote 29] As shown in table 2, we found that CMS did not
ensure that critical cognizant federal agency duties were performed or
that those duties were only partially or insufficiently performed.
Table 2 also shows that CMS did not fully ensure that its cognizant
federal agency duties were completely performed for any of the 8
contractors.
Table 2: CMS's Cognizant Federal Agency Responsibilities:
Contractor: IFMC;
Establish provisional indirect cost rates: Yes;
Establish final indirect cost rates: No[B];
Assess the adequacy of
accounting system[A]: No;
Monitor the adequacy of disclosure statement and/or CAS compliance:
Yes.
Contractor: Ketchum;
Establish provisional indirect cost rates: No;
Establish final indirect cost rates: No;
Assess the adequacy of
accounting system[A]: Insufficient[D];
Monitor the adequacy of disclosure statement and/or CAS compliance: No.
Contractor: Maximus;
Establish provisional indirect cost rates: No;
Establish final indirect cost rates: No;
Assess the adequacy of
accounting system[A]: Yes;
Monitor the adequacy of disclosure statement and/or CAS compliance: No.
Contractor: Pearson;
Establish provisional indirect cost rates: Yes;
Establish final indirect cost rates: No;
Assess the adequacy of
accounting system[A]: Insufficient[E];
Monitor the adequacy of disclosure statement and/or CAS compliance:
n/a[F].
Contractor: Palmetto;
Establish provisional indirect cost rates: No;
Establish final indirect cost rates: No;
Assess the adequacy of
accounting system[A]: Insufficient[E];
Monitor the adequacy of disclosure statement and/or CAS compliance:
Insufficient[G].
Contractor: TrailBlazer;
Establish provisional indirect cost rates: No;
Establish final indirect cost rates: No;
Assess the adequacy of
accounting system[A]: Insufficient[D];
Monitor the adequacy of disclosure statement and/or CAS compliance: No.
Contractor: ViPS;
Establish provisional indirect cost rates: Yes;
Establish final indirect cost rates: Partial;
Assess the adequacy of
accounting system[A]: Insufficient[D];
Monitor the adequacy of disclosure statement and/or CAS compliance: No.
Contractor: Z-Tech;
Establish provisional indirect cost rates: Yes;
Establish final indirect cost rates: No[C];
Assess the adequacy of
accounting system[A]: No;
Monitor the adequacy of disclosure statement and/or CAS compliance:
n/a[H].
Source: GAO analysis of CMS, NIH, and DCAA rate letters and audit
reports.
Legend:
Yes - Responsibilities were adequately performed.
No - Responsibilities were not performed.
Partial - Rates were established for at least 1 year between 2004 and
2006, but not all the years necessary.
Insufficient - Responsibilities were not sufficiently performed to
fulfill cognizant federal agency oversight.
[A] This responsibility was adequately performed if an assessment of
the accounting system was performed and, if necessary a risk analysis
was performed showing that a more thorough assessment was not
necessary.
[B] DCAA performed an audit of IFMC's indirect cost rates for 2004 and
identified several questioned costs. Additionally, audits of 2005 and
2006 indirect cost rates were recently completed. According to CMS, it
has not settled the final indirect cost rates for these years. CMS was
instructed by HHS OIG to not finalize indirect cost rates due to an OIG
audit that was recently completed.
[C] NIH issued negotiation agreements that included "final rates" for
2004 and 2005. However, the documents do not indicate whether an audit
of actual costs was performed.
[D] A preaward survey of the accounting system was performed by DCAA.
However, CMS did not provide documentation to show that a risk analysis
was performed to determine whether a more thorough accounting system
audit was necessary.
[E] At the request of CMS, DCAA performed a preaward accounting system
survey. However, despite the volume of contracting, a full accounting
system audit was not done.
[F] n/a = not applicable. At the request of another agency, DCAA
performed an examination of Pearson's disclosure statement in 2005,
prior to CMS becoming the cognizant federal agency.
[G] At the request of CMS, DCAA performed an examination of the
compliance with CAS. In its October 2006 report, DCAA stated that
because of significant inadequacies, it was unable to complete its
examination. We found no evidence of a follow-up examination.
[H] n/a = not applicable. The contractor was not subject to CAS during
the period of our review.
[End of table]
We found that the listings CMS provided of the contractors for which it
was the cognizant federal agency and other contractors were not
complete or accurate. CMS provided us with two listings, one prepared
in 2005 and another prepared in 2007. The 2005 listing included data
fields to record the applicable cognizant federal agency and the status
of the cognizant federal agency responsibilities listed in table 2.
However, this listing was missing key information for several
contractors. For example, there was no information regarding the
cognizant federal agency for Ketchum or the status of the cognizant
federal agency responsibilities. The 2007 listing included a data field
to record the applicable cognizant federal agency, but did not have
data fields to record the status of cognizant federal agency
responsibilities. In addition, the listings did not clearly or
consistently identify whether CMS was the cognizant federal agency. For
example, in the 2005 listing, CMS was identified as the cognizant
federal agency for IFMC; however, IFMC was not included in the 2007
listing. Subsequently, we verified with CMS officials that CMS was
still the cognizant federal agency for IFMC but it was inadvertently
excluded from the 2007 listing.
The CAS states that agencies shall establish internal policies and
procedures to govern how to monitor contractors' CAS compliance, with a
particular emphasis on interagency coordination activities.[Footnote
30] CMS did not have agency-specific policies and procedures in place
to help ensure that its cognizant federal agency responsibilities were
properly performed, including the monitoring of contractors' CAS
compliance. Of the eight contractors in our review, for which CMS was
the cognizant federal agency, seven were subject to CAS[Footnote 31] at
the end of fiscal year 2006. Generally, CMS requested DCAA to perform
audit work for some of its cognizant federal agency duties. Further,
for HHS, NIH was the agency assigned responsibility for auditing
provisional and final indirect rates. However, NIH would not know this
work is needed, unless CMS makes a request. In January 2007, one
contractor sent a letter to CMS indicating that while CMS had performed
some of the cognizant federal agency functions "on an ad hoc basis over
the past year," the contractor wanted "to have a more formal
relationship in place." The contractor noted that until its indirect
cost rates are audited and finalized, it will be "unable to submit
final closeout invoices on [its] cost reimbursable work."
Because other agencies rely on the work performed by cognizant federal
agencies in their own contracting activities, CMS's failure to ensure
its cognizant federal agency responsibilities were fulfilled not only
increased risks to CMS, but also to other federal agencies that use the
same contractors. For example, we noted that according to one
contractor's audited financial statements, as of December 31, 2005, the
contractor reported a liability of about $3.8 million for billing the
government more than its actual costs, including about $2.8 million
associated with CMS contracts and $1.0 million related to a DOD
contract. At the time of our review, CMS, as the contractor's cognizant
federal agency, had not established its final indirect cost rates for
years after 2004, which would be necessary for CMS and DOD to collect
the overbilled amounts.
CMS officials and cost/price team members attributed their limited
ability to request contract audits--those required by FAR to fulfill
cognizant federal agency responsibilities and for the contract closeout
process--to the lack of sufficient allocation of funds for these
efforts. For example, OAGM provided us with documentation that it
requested from CMS management about $1.2 million for fiscal year 2005
and about $3.5 million for fiscal year 2006 to pay for proposal
evaluations, accounting system reviews, and disclosure statement
reviews to help CMS comply with FAR requirements. Despite these
requests, OAGM was provided $30,000 in fiscal year 2005 and $18,320 in
fiscal year 2006. Moreover, no funds were provided for this purpose in
fiscal year 2007.[Footnote 32] Consistent with this, the cost/price
team indicated that contract audits often "fall by the way-side" since
its resources are limited. Not funding contract audits may limit CMS's
ability to closeout contracts, as well as to detect and recover
improper payments. Further, based on our review of payments to
contractors, the contractors that we identified as having more
questionable payments were contractors for which CMS was the cognizant
federal agency.
Risks in Contracting Practices:
Contracting and procurement has been identified as an area that poses
significant challenges across the federal government. Our work and that
of agency inspectors general has found systemic weaknesses in key areas
of acquisition that put agencies at risk for waste and
mismanagement.[Footnote 33] At CMS we found risks resulting from CMS's
failure to allocate sufficient resources for effective contract and
contractor oversight, and we found that CMS engaged in certain
contracting practices that made the agency more vulnerable to waste.
For example, CMS did not always take advantage of the benefits of
competition and frequently used a contract type--cost reimbursement--
that by nature poses more risk to the government because the government
assumes most of the cost risk. In addition, CMS approved some
subcontractor agreements that may have unnecessarily increased the
costs of obtaining those services. We also noted that, when awarding
contracts, contracting officers did not always follow advice from
others such as the cost/price team and HHS Office of General Counsel
that could have mitigated some of these risks.
Noncompetitive Contracts:
CMS is generally required to obtain competition for the goods and
services it procures.[Footnote 34] The FAR provides procedures for
making price determinations[Footnote 35] and emphasizes the use of full
and open competition in the acquisition process.[Footnote 36] Because a
competitive environment generally provides more assurance of reasonable
prices than a noncompetitive one, CMS is exposed to contracting
vulnerabilities and potential waste due to practices that limit
competition. About 45 percent of the contracts included in our review
(representing about $499.1 million in total contract value) were
awarded without the benefit of competition. According to CMS,
noncompetitive procedures were used on the contracts in our review
because (1) there was an unusual or compelling urgency for the work,
(2), the award was made under the Small Business Administration (SBA)
8(a) criteria,[Footnote 37] or (3) the contracted activities were
considered to be a logical follow-on to prior work. While these are
permissible reasons to limit competition, in the examples of the
noncompetitive contracts described below, CMS's contracting practices
may not have sufficiently protected the government's interest in
obtaining the best value, in terms of fair and reasonable prices.
* The FAR allows for noncompetitive procedures when there is an unusual
and compelling urgency that the government would be seriously injured
unless competition is limited. When this exemption is used, an agency
prepares a written justification and requests offers from as many
potential sources as is practicable.[Footnote 38] Prior to a
noncompetitive award to Maximus ultimately valued at about $6.5
million, the HHS Office of General Counsel reviewed CMS's justification
for other than full and open competition and had concerns with the
legal sufficiency of the justification. The Office found that CMS did
not demonstrate how it had met the FAR requirement to obtain offers
from as many sources as possible or how the agency would be seriously
injured if the exemption is not used. Additionally, according to the
Office of General Counsel, the urgent and compelling justification did
not support procurements in excess of a "minimum amount of time," and
suggested limiting the contract to a 5-month term and recompeting the
contract during that time. Despite the advice of the Office of General
Counsel, 2 days later CMS awarded the contract to Maximus for a 9-month
period, never recompeted the contract, and eventually extended the
period of performance another 17 months for a total of 26 months.
* For multiple awards to Z-Tech, CMS justified the sole-source
noncompetitive awards using SBA's 8(a) exceptions to competition
subject to contract value thresholds. To use these exceptions,
generally an agency obtains a written authorization from SBA, which
places a limit on the dollar value of the contract. For one Z-Tech
contract, CMS obtained authorization to award a contract for an amount
up to $3.6 million. SBA also indicated that no other increases would be
authorized under this contract and that further increases should be
competed under a new contract. Nevertheless, CMS exceeded the SBA-
authorized amounts and made awards to Z-Tech totaling about $4.4
million. Further, we found an agency internal document in a contract
file that expressed concern that contract awards to Z-Tech may have
been divided to avoid the dollar threshold that would require
competition for 8(a) procurements.
The FAR allows for limiting competition on the issuance of task orders
under multiple award contracts if doing so is in the interest of
economy and efficiency because it is a logical follow-on to an earlier
task order that had been subject to competition.[Footnote 39] However,
the frequent use of the logical follow-on exemption to competition may
hinder an agency's ability to obtain the best value for the taxpayer.
About 24 percent of the contracts and task orders in our review, with a
total value of nearly $390 million, were issued with no competition as
a logical follow-on to a prior task order. Two of these logical follow-
on task orders had total values of $234.6 million and $67.8 million.
Cost Reimbursement Contracts:
One role of the contracting officer is to select the contract type that
is in the best interest of the government, places reasonable risk on
the contractor, and provides the contractor with the greatest incentive
for efficient and economical performance. Cost reimbursement contracts
are suitable for use only when uncertainties involved in contract
performance do not permit costs to be estimated with sufficient
accuracy to use any type of fixed-price contract. We found that about
78 percent of the contracts we reviewed were cost reimbursement
contracts. These cost reimbursement contracts had a total contract
value of $1.2 billion. Some CMS officials told us that CMS was a "cost-
type shop," meaning that at CMS they prefer cost reimbursement
contracts. When cost reimbursement contracts are utilized, FAR requires
additional procedures to mitigate the increased risk such as adequate
government surveillance.[Footnote 40] However, as discussed later in
this report, CMS did not implement sufficient oversight required for
cost reimbursement contracts. In addition, before awarding a cost
reimbursement contract, the contracting officer is required by FAR to
verify that the contractor has an adequate accounting system for
determining costs applicable to the contract,[Footnote 41] which helps
provide the government assurance that the contractor has systems in
place to accurately and consistently record and bill costs in
accordance with FAR. During our review of CMS's contract files, we
found that contracting officers did not always proactively ensure the
adequacy of contractors' accounting systems prior to award of the cost
reimbursement contracts.
We also noted instances when CMS knowingly awarded cost reimbursement
contracts to a contractor with a deficient accounting system, contrary
to the FAR requirement. Specifically, the CMS cost/price team noted
numerous significant deficiencies in how Palmetto accounted for costs
and determined that Palmetto's accounting system could not adequately
account for its direct labor and indirect costs. The cost/price team
notified the contracting specialist of the accounting system
deficiencies and also stated that "corrections to [Palmetto's] system
cannot be completed by the time this contract is awarded." Despite this
determination by the cost/price team, the contracting officer awarded
two cost reimbursement contracts included in our review to Palmetto
with a total contract value of $157.3 million. Further, the contracting
officer awarded a third contract valued at $3.3 million to Palmetto
without verifying whether or not Palmetto's accounting system
deficiencies were resolved.
CMS also encouraged a contractor to use a cost reimbursement contract,
even though the cost/price team raised concerns regarding the
contractor's proposal of certain costs as direct costs and the
contractor's ability to accumulate and record direct and indirect
costs. Despite these concerns, CMS did not inquire with DCAA about
whether or not an accounting system audit had been performed until
after the contract was awarded. CMS eventually requested an accounting
system audit about a year and a half after contract award. Further, the
contractor expressed concerns regarding the cost reimbursement contract
type requested by CMS because it did not have prior experience with the
contract type. CMS documented in the contract file that "after much
deliberation, the contractor realized it was in [its] best interest to
accept a [cost reimbursement] contract." In some instances,
contractors' inadequate accounting systems inhibited our ability to
audit costs billed to the government because the contractors were
unable to substantiate the costs billed.
Subcontractor Agreements:
While it is not inappropriate for a prime contractor to use
subcontractors to achieve the contract's objectives, CMS's approval of
some subcontractor agreements may have increased the cost to obtain the
services through additional indirect costs and fees. For the contracts
we reviewed, several of the prime contractors subcontracted for
significant volumes of work. For example, on one task order between
February 2004 and February 2005, Ketchum billed about $34.7 million of
which about $33.8 million, or 97 percent, was for subcontractor costs.
Furthermore, about $32.3 million of these costs were related to a
single subcontractor. During this same period Ketchum billed only
$59,509 for direct labor (which would include Ketchum's oversight of
the subcontractors) yet received about $694,000 in fees, or over 10
times more than the direct labor Ketchum provided under the contract.
The contracts for the operation of the 1-800-MEDICARE help line are
another example of cost increases caused by subcontractor agreements.
CMS hired two contractors to operate the help line--Pearson and
Palmetto. While each contractor had its own contract with CMS that
required them to provide similar services, Pearson and Palmetto
subsequently subcontracted with each other, again for the same
services. Consequently, the costs to operate the help line were
increased through additional indirect costs and fees. Specifically, CMS
paid Palmetto an additional $3.6 million (for indirect costs and fees
applied to the Pearson services included with Palmetto's invoices) that
may not have been paid absent the subcontract agreement, such as if
Pearson provided the services under its own prime contract. In
addition, CMS paid Pearson an additional $630,000 in fees that may not
have been paid absent the subcontract agreement.[Footnote 42]
Pervasive Internal Control Deficiencies Increased the Risk of Improper
Payments:
In addition to increased risks associated with CMS's operating
environment and certain contracting practices, pervasive internal
control deficiencies in its invoice review and approval process
increased the risk of improper payments. These deficiencies were caused
in part by inadequate policies and procedures for invoice review and
insufficient training of key personnel. CMS also did not perform timely
contract closeout procedures, including contract audits to determine
the allowability of billed amounts.
Inadequate Invoice Review and Approval Process:
GAO's standards for internal control state that control activities are
the policies, procedures, and mechanisms that address risk and are an
integral part of an organization's stewardship of government resources.
Effective controls are even more important given CMS's risks and
vulnerabilities in the contracting process caused by its operating
environment. Effective policies and procedures for reviewing and
approving contractor invoices help to ensure that goods and services
were actually received and amounts billed represent allowable costs,
and are comprised of numerous control activities. At CMS, the project
officer's role is to review the invoices for technical compliance and
accuracy of quantities billed whereas the contracting specialists' role
is to determine if the amounts billed comply with contract terms such
as indirect cost rates or ceiling amounts.
We found that CMS often used flawed procedures to review and approve
contractor invoices. These flawed procedures were caused, in part, by a
lack of specific guidance and procedures for the contracting officials
to follow as well as insufficient training.
* Inadequate policies and procedures over invoice review: CMS's
policies and procedures did not provide adequate details on how to
review invoice cost elements. For example, CMS's acquisition policy for
invoice payment procedures[Footnote 43] simply states that "the project
officer shall certify whether or not the invoice is approved for
payment" and "the contracting specialist will review the invoice and
(the project officer's certification)." The policy did not give
specific instructions or guidance on how to review an invoice or which
invoice elements receive the most review given the nature of the
services provided or the contract type.
* Lack of requirements for invoice detail: CMS did not have
requirements for contracting officers to ensure that contractors
provide a certain level of detail supporting their invoices to allow
responsible CMS personnel to sufficiently review key elements. As a
result, CMS often did not require contractors to provide adequate
detail in invoices to review billed costs, such as labor charges or
travel. For example, some contractors included only lump sum amounts
showing the number of hours worked and the associated dollar amount for
labor costs but did not provide a list of hours worked by employee or
respective labor rates. Without this information, it was not possible
for CMS to verify whether the amounts billed corresponded to employees
who actually worked on the project. One contractor stated that CMS
requested only lump sum amounts for travel with no detailed information
or travel receipts. Without this information, CMS could not verify that
travel costs were related to the contract or were in accordance with
FAR requirements.
* Insufficient training: CMS did not sufficiently train staff on how to
adequately review invoices, such as identification of risks to the
government based on contract type and how to verify labor rates or
hours worked. As a result, project officers and contracting specialists
were not always aware of their invoice review responsibilities. Some
project officers told us that they had only received training "on-the-
job." Further, several staff we interviewed referred to the Project
Officer Handbook as a source for guidance on the project officer's
responsibilities. We reviewed this handbook and found that it did not
provide any practical guidance on how to review invoices and focused
more on the acquisition process (i.e., developing statements of work
and preparing acquisition planning documents). In addition, two
contracting officers said they attended a 2-hour training sponsored by
CMS's Office of Financial Management (OFM) and that it was helpful in
providing guidance on how to review invoices. We also reviewed this
training material and found that the training did not sufficiently
cover invoice review procedures. The training materials included one
slide that indicated that it was the project officers' responsibility
to review invoices, but it did not provide specific examples of invoice
review procedures. An OFM official told us that the training was
intended to provide detailed guidance on budgeting and appropriation
procedures and not invoice review.
* Lack of incentive to review invoices: CMS uses a payment process--
negative certification--whereby OFM paid contractor and vendor invoices
without knowing whether or not such invoices were reviewed and
certified. Negative certification is used, in part, to help the agency
meet Prompt Payment Act requirements.[Footnote 44] However, this
process is the default for all invoice payments regardless of factors
that may increase risk to the agency, including contract type or prior
billing problems with the contractor. By contrast, DOD allows for
contractors to participate in direct billing, a process similar to
negative certification, only if the contractors meet certain criteria
such as adequate accounting systems, billing rates established based
upon recent reviews, and timely submissions of cost information as
required by FAR. CMS's negative certification process provides little
incentive for personnel to perform timely reviews of invoices or for
reviews to even take place. In our review of contract files, we found
that certificates of review by the project officer were not always
included in the contract files, and when the certificates were included
in the file, they generally did not include evidence to document the
review, such as tickmarks or notes, and they were not always signed.
Without sufficient policies and procedures, training, and incentives to
review invoices, we found that key staff often used flawed procedures.
Contracting officers, specialists, and project officers told us they
reviewed invoice costs, such as labor rates for cost reimbursement
contracts, based on amounts proposed by the contractor prior to award.
However, this practice has little value for cost reimbursement
contracts because FAR calls for the payment of actual allowable
costs,[Footnote 45] rather than costs proposed prior to performance of
the contract.
Contracting specialists and project officers also told us they reviewed
invoices by comparing current invoices to prior months and to burn
rates (the rate at which CMS is expending dollars that are obligated to
the contract). This procedure provides no assurance that the amounts
billed are allowable. Additionally, several project officers told us
that they compared invoices to monthly reports prepared by the
contractors. This procedure has limited value because it does not
involve verifying amounts billed to source documents, such as time
sheets, payroll registers, or vendor invoices. Also, when we reviewed
the monthly reports, we noted that the reports were not always
reconcilable to the invoices, which would hinder the project officer's
ability to use the monthly reports in determining the validity of the
billed amounts. As described later in this report, we found payments
for potentially unallowable costs that could have been identified had
proper invoice review procedures been in place.
Further, contracting and project officers did not call for additional
oversight procedures when they approved complex subcontractor
arrangements such as when a contractor provides the same services as
both a prime contractor and as a subcontractor to another contractor.
When these types of relationships exist, improper payments or double-
billings may go undetected if a contractor bills the same services on
both its prime contract invoices (which are reviewed by the government)
and its subcontract invoices (which are reviewed by the other prime
contractor). Further, some officials indicated that they relied on
contract audits rather than invoice review procedures to catch improper
payments. One contracting officer stated that it was not the
contracting officer's or specialist's responsibility to review invoices
for fraudulent billings, such as double-billings, because such billings
would only be found during a closeout audit. While an audit during the
closeout process may provide a detective control to identify improper
payments after they were made, timely invoice review procedures provide
the necessary preventive controls to help ensure that improper payments
are not made and would allow CMS to take corrective actions, if
necessary. For example, it would be more effective to review the
accuracy of labor billings while the contractor is still performing
services rather than after the fact during the closeout process, which
may be several years later.
Untimely Contract Closeout:
CMS did not perform its contract closeout procedures in accordance with
FAR time frames, and until recently, did not have contract closeout
policies. The FAR requires agencies to closeout a contract after the
work is physically completed (i.e., goods or services are
provided).[Footnote 46] The closeout process is an important internal
control, in part, because it is generally the last opportunity for the
government to detect and recover any improper payments. The closeout
process includes verifying that administrative matters are completed,
adjusting provisional indirect cost rates for actual final indirect
cost rates, performing a contract audit of costs billed to the
government, and making final payments. The complexity and length of the
process can vary with the extent of oversight performed by the agency
and the contract type. The FAR generally calls for fixed price
contracts to be closed within 6 months; contracts requiring the
settlement of indirect costs rates, such as cost reimbursement
contracts, to be closed within 36 months; and all other contracts to be
closed within 20 months.[Footnote 47] These time frames begin in the
month in which the contracting official receives evidence of physical
completion of the contract.
According to information provided by OAGM management, as of September
30, 2007, CMS's contract closeout backlog was approximately 1,300
contracts with a total contract value of approximately $3 billion. The
backlog report indicated that 407 contract closeouts were overdue
according to FAR timing requirements. Currently, CMS has only one
contracting officer responsible for the closeout process. Several of
the contracts on the backlog list completed contract performance as far
back as 1999. CMS established agency-specific contract closeout
policies in February 2007. One CMS official stated that prior to the
closeout policies, some contracting officials and specialists often
passed on contract files to the closeout staff before compiling all
required documentation. Because of this, the sole staff member
responsible for CMS's contract closeout procedures has to spend time
tracking down required documents rather than performing actual closeout
procedures.
A key element of the closeout process is the contract audit of costs
billed to the government. This audit is used to verify that the
contractor's billed costs were allowable, reasonable, and allocable,
which is critical for a cost reimbursement contract. This audit is even
more important at CMS because of CMS's dependence on cost reimbursement
contracts and the reliance placed on the contract audits instead of
invoice review procedures. As previously mentioned, CMS has not
allocated sufficient resources to ensure contract audits take place. As
a result, CMS has limited its ability to detect and recover improper
payments from contractors.
CMS Made Nearly $90 Million of Questionable Payments to Contractors:
Because of the risks in CMS's contracting practices and pervasive
internal control deficiencies, CMS was highly vulnerable to waste and
improper payments. Due to this increased risk, we selected contractor
transactions to test and found nearly $90 million of payments to
contractors that we questioned because the payments were potentially
improper, unsubstantiated, or wasteful. Potentially improper payments
include payments for costs that did not comply with the terms of the
contract or applicable regulation. Unsubstantiated payments are related
to costs that were not adequately supported. Wasteful payments are
those for which risks in CMS's contracting practices may have resulted
in CMS not obtaining the best value. In some cases, a portion of the
questionable payment most likely relates to allowable costs, but due to
the facts and circumstances involved, we were unable to determine
whether or to what extent the costs were allowable, reasonable, and
allocable. As a result, some portion of the total amount of
questionable payments we identified ultimately may be determined by CMS
to be allowable and therefore not recoverable from the contractor.
Table 3 summarizes the questionable payments we identified. Appendix I
provides a summary by contractor of the questionable payments we
identified.
Table 3: Summary of Questionable Payments (Dollars in millions):
Type of questionable payment: Costs not compliant with contract terms
or regulations;
Amount: $24.5.
Type of questionable payment: Unsupported contractor costs;
Amount: 62.7.
Type of questionable payment: Potential waste;
Amount: 6.6.
Type of questionable payment: Less overlapping amounts[A];
Amount: (5.0).
Type of questionable payment: Total;
Amount: $88.8.
Source: GAO analysis of contractor invoices and data.
[A] In certain instances, a portion of a questionable payment may fall
into more than one category (i.e., a payment may be both potential
waste and not compliant with contract terms). Therefore, to avoid
double counting questionable payment amounts, we reduced the gross
questionable payment amount by the overlapping amount ($5.0 million).
[End of table]
Because CMS sometimes used other funding sources in addition to MMA to
pay invoices for one contract, we were not always able to identify
specific costs that were paid with MMA funds. As a result, the scope of
our review extended beyond payments made with MMA funds for some
contracts and the amount of questionable payments we identified may not
have been paid solely with MMA funds. Given CMS's poor control
environment and the fact that our work was not designed to identify all
questionable payments made by CMS or to estimate their extent, CMS may
have made other questionable payments. Appendix II provides details on
the amounts by contractor that we reviewed and the amounts paid with
MMA funds.
Questionable Payments for Costs Not Compliant with Contract Terms or
Regulations:
Contracts contain the terms and provisions that set the parameters for
allowable costs and the necessary documentation required to support the
contractor's billings. For example, contracts may set ceiling limits on
the amount of indirect costs a contractor may bill or the amount a
contractor may bill for subcontractor costs. Additionally, contracts
also incorporate numerous FAR provisions that the contracting officer
determines to be applicable to the contract that may require the
contractor to follow CAS or may restrict the contractor's travel costs.
The contractor is required to bill the government in accordance with
the terms of the contract and, as part of its invoice review and
approval process, the government's responsibility is to ensure that
billings comply with those terms. We identified numerous questionable
payments totaling about $24.5 million that represent potentially
improper payments for contractor costs not compliant with the terms of
the contract or applicable regulation.
* Labor categories outside the terms of the contract - $1.7 million:
CMS paid CGI, BAH, International Business Machines (IBM), and IFMC for
labor categories which were not specifically listed in the terms of the
task orders. For example, CGI's task order specified "should the
contractor wish to utilize additional GSA IT labor categories—prior CMS
approval must be obtained." CGI did not seek and CMS did not give
approval for the use of four labor categories, totaling about $1.3
million. Also, CMS paid BAH about $208,000 for labor categories that
were not specifically listed in the terms of the task order. BAH told
us that in its proposal for a modification to the task order, it
proposed using the additional labor categories. However, according to
the task order, the modification, and other CMS internal contract
documents, no additional labor categories were added to the contract.
During our review, we also identified payments to IBM and IFMC of about
$231,000 and $3,000, respectively for labor categories that were not
specifically listed in the terms of the task orders. In these four
instances, CMS made questionable payments of over $1.7 million.
* Indirect cost rates exceeded contract ceiling rates - $17.6 million:
CMS paid Palmetto, TrailBlazer, and Maximus for indirect costs that
exceeded amounts allowed under indirect cost rate ceilings established
in the respective contracts. The contract between CMS and Palmetto
included acceptable indirect cost rates, based upon the indirect costs
proposed by Palmetto, and applicable ceiling rates. Overhead was not
included in the contract as an accepted indirect cost. Nevertheless,
Palmetto billed, and CMS paid, at least $16.2 million of overhead
costs. CMS told us that the contract was not modified to include
overhead and that "for the government to continue business with
[Palmetto] in good faith...[CMS] had to work with Palmetto as it
transitioned to becoming CAS and FAR compliant." Palmetto notified CMS
that an overhead rate was added to its billing structure, yet CMS did
not modify the contract to include the overhead rate. In addition,
TrailBlazer billed nearly twice as much as the contract allowed for
overhead. During 2006, CMS paid TrailBlazer $1.4 million for G&A and
overhead costs greater than the amount allowed by rate ceilings in the
contract between CMS and TrailBlazer. TrailBlazer told us that the
indirect cost rate ceilings incorporated into its contract at the time
of award were based on its accounting system that, at the time, was not
compliant with CAS. Subsequently, in January 2006, when TrailBlazer
changed its accounting system to be CAS compliant, the rate ceilings
were no longer reflective of its billing structure. In June 2007,
TrailBlazer submitted to CMS, its cognizant federal agency, a cost
report supporting an increase to its indirect cost rates for 2006.
However, CMS did not issue a modification to amend the contract and
increase the indirect cost rate ceilings. CMS also paid Maximus $16,000
in excess of its G&A rate ceiling. In these three instances, CMS made
questionable payments of over $17.6 million.
* Subcontractor costs exceeded approved amount -$489,000: CMS paid CGI
about $489,000 for subcontractor costs above the not-to-exceed amount
established when CMS approved CGI's use of subcontractors.
* Improper use of contract type - $4.5 million: In February 2005, CMS
issued a sole-source, T&M task order to IBM under a commercial Army
contract to procure commercial services. Because the FAR prohibited the
use of other than fixed-price contracts to procure commercial services
at the time the task order was awarded,[Footnote 48] we questioned the
payments to IBM under this task order totaling approximately $4.5
million.
* Travel costs exceeding limits - $11,000: CMS paid ViPS and CGI for
travel costs that exceeded FAR limits incorporated in their contracts.
The FAR prohibits contractors from billing for other-than-coach
transportation or above set limits for hotels, meals and incidentals,
and mileage reimbursement. In several instances, ViPS billed the
government $299 or more a night, in one case as high as $799 a night,
excluding taxes, for hotel stays in Manhattan. During the applicable
period, the federal hotel per diem limit for Manhattan was at most $200
a night. Additionally, the contractor billed the government for
business class train travel and amounts that exceeded the meals and
incidentals per diem. Each of the 14 ViPS travel vouchers we tested
included costs that exceeded allowed amounts. In total, we identified
questionable payments of nearly $10,000 for ViPS travel. CMS also
reimbursed CGI about $1,000 for travel costs in excess of allowed per
diem limits.
* Inappropriate calculation of labor - $9,000: CMS paid Ketchum for
labor costs that exceeded Ketchum's actual costs for those services on
a cost reimbursement contract. Ketchum did not adjust its hourly labor
rates to bill for actual labor costs when exempt salaried employees
(employees not eligible for overtime compensation) worked more than the
standard hours in a pay period. By not adjusting (decreasing) the
hourly labor rate to reflect the number of hours actually worked when
an employee worked more than the standard hours, Ketchum charged the
government more than its cost--the employee's salary. For example, if
an exempt employee earns $4,000 for working a 40-hour week, the
employee's hourly rate would be $100 ($4,000/40 hours). If that
employee worked 50 hours in a week, the employee still earns $4,000 and
the hourly rate would be adjusted to $80 ($4,000/50 hours). In this
scenario, if the hourly rate were not adjusted, the contractor would
have billed $5,000 ($100 * 50 hours) when its actual costs were only
$4,000. Based on the labor transactions we selected for review totaling
about $214,000, we estimated that CMS made about $9,000 of questionable
payments as a result of Ketchum not adjusting its hourly labor rates.
* Labor costs inappropriately billed - $20,000: CMS paid nearly $20,000
to IFMC for vacation and sick leave that IFMC billed directly to the
government. The FAR defines a direct cost as a cost that benefits a
single cost objective (e.g., a contract) and an indirect cost as a cost
that benefits more than one cost objective.[Footnote 49] Costs such as
employees' fringe benefits, vacation and sick leave, and other
headquarters costs are common indirect costs. IFMC billed vacation and
sick leave directly to contracts that an employee worked on only at the
time the leave was taken. By billing vacation and sick leave as direct
costs, IFMC may have billed more than CMS's portion of the costs to
CMS. For example, if an employee worked on one contract for 11 months
and a new contract in the twelfth month and also took leave in the
twelfth month, only the contract that the employee worked on in the
twelfth month would bear the entire cost of the leave. Had IFMC
included its costs associated with vacation and sick leave in its
indirect cost rates, these costs would have been proportionally
allocated to all of IFMC's contracts. Therefore, some of the nearly
$20,000 of questionable payments would likely be offset by an increase
in the indirect cost rates; however, we could not determine what that
amount would be. In total, IFMC billed CMS about $4.3 million for
direct labor from June 2005 through January 2006. Because we only
reviewed $152,000 of labor charges, the total labor billed by IFMC may
include additional costs associated with vacation and sick leave.
* Labor rates in excess of contract terms - $31,000: CMS paid CGI for
one labor category at rates higher than the rates allowed in its T&M
contract, resulting in additional costs of about $31,000. According to
CGI, it intends to issue a credit to CMS for the overbilling.
* Duplicate billing - $95,000: CMS paid about $95,000 for equipment
that CGI billed twice. CGI discovered the double billing for equipment
as a result of our audit and subsequently issued a credit to CMS for
the double billing.
Questionable Payments for Unsupported Contractor Costs:
Under a cost reimbursement contract, in which a contractor bills the
government for allowable costs to achieve the contract objectives, the
FAR requires the contractor to maintain adequate accounting systems and
other documentation to support the amounts the contractor bills. For
example, the FAR requires contractors to maintain documentation, such
as time sheets, pay information, or vendor invoices. Additionally, FAR
stipulates that supporting documentation must be maintained for 3 years
after the final payment.[Footnote 50] We identified about $62.7 million
of questionable payments for unsubstantiated contractor costs that were
not adequately supported. For each of the questionable payments
described below, a portion of the questionable payment most likely
relates to allowable costs, but due to the different facts and
circumstances involved, we were unable to determine whether or to what
extent the costs were allowable, reasonable, and allocable. As a
result, some portion of the total amount of questionable payments we
identified ultimately may be determined by CMS to be allowable and
therefore not recoverable from the contractor.
* Unsupported contractor costs - $50.8 million: CMS paid $40.6 million
to Palmetto for costs that were not adequately supported and $10.2
million to Pearson for subcontractor costs related to Palmetto that
were also not adequately supported.
CMS's cost/price team's review of Palmetto's proposal identified
numerous concerns about Palmetto's ability to record and bill costs.
Specifically, the cost/price team noted that Palmetto's accounting
practices were not compliant with several CAS requirements, its labor
system did not distinguish between direct labor and vacation time, and
its accounting system did not use indirect cost rates. The cost/price
team also indicated that Palmetto was working on addressing these
issues, but that it would probably be a lengthy process because of the
numerous deficiencies. Despite the concerns about Palmetto's ability to
record and bill costs, CMS awarded Palmetto three cost reimbursement
contracts, contrary to the FAR requirement[Footnote 51] that the
contractor must have an adequate accounting system for recording and
billing costs. In this instance, CMS's decision to award cost
reimbursement contracts to a contractor with accounting system
deficiencies and CMS's failure to establish Palmetto's indirect cost
rates inhibited our ability to audit the costs billed to CMS.
In response to our request for transaction-level detailed reports of
costs billed to CMS, Palmetto officials told us that its accounting
systems[Footnote 52] could not generate a report that summarized the
costs billed to CMS and that invoices were created manually by
allocating costs (direct and indirect) from its cost centers. In
addition, we were told that prior to June 2005, Palmetto did not
require its salaried employees to use time sheets.
Even though Palmetto told us its salaried employees were not required
to use time sheets, Palmetto was able to provide many time sheets to
support labor costs it billed. To gain an understanding of the type of
information available that Palmetto could provide to support its other
direct costs billed, we asked Palmetto to support the costs billed on
four invoices. In response, Palmetto provided travel vouchers,
subcontractor invoices, and numerous cost center reports and
spreadsheets. The travel vouchers and subcontractor invoices supported
the amounts billed to CMS. The cost center information represented
costs that were directly allocated to the CMS contract. However,
Palmetto did not support how it determined the percentages it used to
allocate the costs to the CMS contract. Further, when we analyzed the
cost center information, we noted several unusual transactions,
including depreciation for office and cafeteria furniture, computer
equipment, and basketball goals; building and lawn maintenance; and
janitorial, security, and recycling services. Because these costs could
reasonably benefit more than one cost objective or contract, these
types of costs are generally included in a contractor's indirect cost
rates rather than billed directly to a contract. Essentially, to audit
these costs, all of Palmetto's operations--not just the costs allocated
to the three CMS contracts included in our review--would need to be
audited to determine whether the costs were allowable. This type of
contractor oversight is normally performed by the cognizant federal
agency, which for Palmetto is CMS.
Because of the uncertainties associated with Palmetto's other direct
costs (which based on the cost center reports seem to include
significant allocations of indirect costs) we concluded that we were
unable to audit the other direct costs (excluding travel and
subcontractor costs) totaling $6.1 million billed to CMS prior to June
2005 when Palmetto changed its accounting system to be compliant with
CAS.
In addition, we could not verify the allowability and reasonableness of
$34.5 million of indirect costs billed to CMS on the three Palmetto
contracts covering 2004 through 2006.[Footnote 53] On a cost
reimbursement contract, indirect costs can be a substantial portion of
the total contract cost. FAR requires that 6 months after the close of
a year, contractors with cost reimbursement contracts must submit a
report of their final costs to their cognizant federal agency.[Footnote
54] On October 2, 2006, Palmetto submitted to its CMS contracting
officer a report of its 2005 final costs. However, CMS may not have
realized that Palmetto submitted this report because, according to a
letter from CMS's cost/price team to Palmetto dated June 4, 2007, CMS
notified Palmetto that its 2004 and 2005 final cost reports were
delinquent according to FAR. Further, as of October 2007, Palmetto had
not provided to CMS its final cost report for 2006, which is delinquent
according to the FAR. Because Palmetto's final cost reports for 2004,
2005, and 2006 have not been audited by CMS its cognizant agency,
Palmetto's final indirect cost rates have not been established.
Further, provisional indirect cost rates have not been established.
Therefore, we did not have support to verify the allowability and
reasonableness of the indirect costs that were billed. Moreover, as
discussed above, it appeared that indirect costs from Palmetto's cost
centers were directly allocated to the CMS contract. As a result, there
is considerable risk that CMS may have been billed twice for Palmetto's
indirect costs--once as an allocated direct cost and again as an
indirect cost.
The issues described above related to Palmetto's other direct costs and
indirect costs also affected the amounts CMS paid to Pearson for
Palmetto as a subcontractor. As a result, additional payments totaling
$10.2 million were unsupported.
Because of these numerous concerns described above and lack of
documentation to verify amounts billed, CMS made questionable payments
totaling $50.8 million ($6.1 million, $34.5 million, and $10.2
million), which represents the direct and indirect costs that were not
adequately supported during our review.
* Unsupported contractor costs - $9.7 million: CMS paid about $9.7
million to TrailBlazer for costs that TrailBlazer did not adequately
support related to a cost reimbursement contract ($4.8 million)
[Footnote 55] and a portion of its Medicare contract ($4.9 million)
paid with MMA funds.[Footnote 56] After numerous requests spanning over
7 months, TrailBlazer did not provide us with adequate documentation
supporting the amounts billed to CMS for these contracts. For the cost
reimbursement contract, the $4.8 million that TrailBlazer did not
adequately support included $2.4 million of labor costs, $654,000 of
other direct costs, and $1.8 million of indirect costs. For the labor
costs, TrailBlazer told us that only its parent company could provide
transaction information, which was never provided. Instead, TrailBlazer
provided several reports summarizing labor and other direct costs;
however, we could not use these reports because they did not reconcile
to the amounts billed to CMS and often included only summary level
information. For the indirect costs, generally these costs are
supported with provisional or final indirect cost rates that have been
audited by a contractor's cognizant federal agency. However, as of
October 2007, CMS, TrailBlazer's cognizant federal agency, has not
ensured that TrailBlazer's indirect cost rates were audited.
TrailBlazer submitted a cost report of its indirect costs for 2006 to
CMS in June 2007.
For the $4.9 related to the Medicare contract, TrailBlazer provided a
one-page document that summarized the total amount by types of costs,
such as salaries, equipment, and fringe benefits. This was not
sufficient for us to review the costs.
* Unsupported indirect costs - $1.2 million: CMS paid at least $1.2
million to Ketchum for indirect costs that were not adequately
supported with recently audited provisional or final indirect cost rate
information. From May 2004 through October 2006, CMS paid Ketchum for
indirect costs based on indirect cost information from 1999. Because
FAR calls for indirect cost rates to be based on recent information and
established annually, rates based on information from 1999 did not
adequately support costs billed in 2004 through 2006. Further, in our
review of the contract file, we noted documentation from 2004 that
alerted CMS to potential issues with Ketchum's indirect cost rates--
namely, that the rates were too high. In September 2006, Ketchum
submitted cost reports for its 2001 through 2005 actual indirect costs.
According to Ketchum officials, CMS, as the cognizant federal agency,
has recently initiated an audit of this indirect cost rate information
to establish final rates for these years.
* Unsupported labor costs - $383,000: Based on the task orders in our
review, we estimated that $383,000 of BearingPoint's billings for labor
and fringe benefits costs were not adequately supported. BearingPoint
was unable to provide us with support for certain key elements of the
labor and fringe benefits costs it billed on the five task orders in
our review.
* Unsupported transactions - $463,000: During our audit, contractors
could not adequately support several miscellaneous transactions
totaling $463,000.
- Palmetto billed CMS for about $79,000 of labor and about $323,000 of
Kelly Services costs which it did not support with documentation such
as time sheets or vendor invoices. Therefore, we were unable to verify
the amounts billed.
- IFMC billed CMS for about $49,000 of other direct costs such as
referral bonuses and placement fees that IFMC did not adequately
support. In some cases, IFMC provided invoices for the costs but did
not provide support that would enable us to verify that these costs
solely benefited and were directly allocable to the CMS contract.
- BearingPoint billed CMS for about $5,000 of other direct costs which
it did not support with vendor invoices. Therefore, we could not verify
the amounts billed.
- CGI billed CMS for about $5,000 of other direct costs which it did
not support with vendor invoices. Therefore, we could not verify the
amounts billed.
- Maximus billed CMS for about $2,000 of other direct costs which it
did not support with documentation that would allow us to verify that
these costs were directly allocable to the CMS contract.
* Unsupported contractor costs - $60,000: CMS paid BAH more than
$60,000 for intercompany labor costs billed on a cost reimbursement
contract that the contractor did not adequately support the rates
billed to CMS. For example, on one task order, the intercompany hourly
rates, on average, were nearly 14 times higher than the average hourly
rate for other BAH employees and almost 6 times higher than the next
highest BAH employee. We noted that in a proposal review, CMS's cost/
price team raised a concern that BAH's proposed intercompany hourly
rates were "excessive and unreasonable" and requested BAH to provide
support for the proposed rates. Even though BAH refused to provide the
support to CMS, CMS awarded the contract. We noted that some of the
rates BAH charged for intercompany labor exceeded the proposed rates
that were questioned by CMS by, on average, 65 percent. BAH did not
provide us support for the rates, but stated that the rates were
commercial billing rates priced based on the private sector market.
* Unsupported labor costs - $90,000: CMS paid Ketchum for labor costs
that Ketchum could not support were appropriately allocated to the CMS
contract. For cost reimbursement contracts, contractors generally
calculate an employee's hourly labor rate by dividing the employee's
annual salary by 2,080 hours (the standard number of work hours in a
year). Ketchum calculated standard hourly labor rates based on 1,880
hours, which increased the hourly rates to account for employees' leave
time. However, this calculation method assigned costs for leave time
regardless of whether the leave was taken (when the actual cost
occurs). Generally, contractors include the costs of leave time in
indirect cost rates, which allocate costs proportionally to all
contracts, and when the indirect cost rates are finalized, billed costs
are adjusted based on actual costs. Because Ketchum incorporated
expected leave time in its hourly labor rates, its billings to CMS
would not be adjusted based on its actual costs. Since we were not able
to verify that the cost of the leave was appropriately allocated to the
CMS contracts, we estimated that CMS made almost $90,000 of
questionable payments as a result of Ketchum using 1,880 hours instead
of 2,080 to calculate hourly rates. A portion of the $90,000 would
likely be offset by an increase in indirect costs if Ketchum had
allocated its leave time to its indirect cost rates.
Questionable Payments Related to Potential Waste:
During our review, we identified certain contracting practices that
increased the risk that CMS did not obtain the best value, thus leading
to potential waste. Therefore, we question whether certain contract
costs were an efficient use of government resources or might have been
avoided. Waste involves the taxpayers in the aggregate not receiving
reasonable value for money. Importantly, waste involves a transgression
that is less than fraud and abuse. Most waste does not involve a
violation of law or regulation but rather relates to mismanagement or
inadequate oversight. We identified $6.6 million of questionable
payments for which CMS may not have received the best value. Because
waste is generally caused by mismanagement or inadequate oversight, the
total amount of questionable payments we identified may not be
recoverable from the contractor.
* Excess subcontractor costs - $1.4 million: CMS missed opportunities
to save about $1.4 million associated with costs Z-Tech, IBM, and CGI
billed for subcontractors under T&M contracts. According to DCAA, the
"T&M payments clause,"[Footnote 57] generally included in T&M
contracts, required that contractors bill the government for
subcontractor labor hours at cost. GSA took the position that prime
contractors should bill for subcontracted labor at the prime
contractor's own labor rates (regardless of the contractor's cost).
DCAA stated that such a practice places the government at a greater
risk of paying costs higher than what prime contractors actually pay
without receiving any additional benefits. Further, DCAA noted that the
practice incentivizes contractors to maximize profits by subcontracting
more work and forces the government to expend additional resources to
monitor the subcontracted labor.[Footnote 58]
We noted three instances where CMS allowed prime contractors to bill
subcontractor labor hours at their own labor rates rather than the
lower actual cost. For example, IBM paid about $1.1 million for its
subcontractor labor but billed CMS about $2.0 million, representing an
increase of about $900,000 or over 80 percent. Likewise, CGI billed CMS
about $420,000, or about 60 percent, more than the amount CGI paid for
subcontractor labor and Z-Tech billed CMS about $91,000, or nearly 35
percent, more than the amount Z-Tech paid for subcontractor labor.
According to Z-Tech and CGI, they both notified CMS of their plans to
bill subcontractor labor hours under their own labor rates (rather than
actual cost) in their contract proposals, which were accepted by CMS.
Further, because CMS inappropriately issued IBM's T&M contract off a
commercial contract, as previously discussed, the commercial contract
did not contain the T&M payments clause. Because CMS did not
proactively limit the contractor's billings for subcontractor services
to cost, CMS missed an opportunity to save, in total, about $1.4
million.
* Additional costs billed by prime contractors - $4.2 million: CMS paid
Palmetto and Pearson additional costs due to subcontracting
arrangements that may have been avoided. As previously mentioned,
Palmetto and Pearson each had a prime contract with CMS and
subcontracted with each other for similar services. For Palmetto's
prime cost reimbursement contract with CMS, Palmetto applied indirect
costs and fees to the amounts it billed CMS for the subcontracted work
provided by Pearson, which already included Pearson's indirect costs
and fees. As a result, two layers of indirect costs and fees were
applied to the same services. If CMS had not permitted this
subcontracting relationship, the additional layer of indirect costs and
fees applicable to Palmetto's billings, totaling $3.6 million,[Footnote
59] may have been avoided. Likewise, CMS paid Pearson an additional
$630,000 in fees that may not have been paid absent the subcontract
agreement.
* Unallowable costs included in indirect cost rates - $953,000: Prior
to September 2005, CMS did not require CGI to exclude independent
research and development (IR&D) costs from its indirect cost rates. The
HHSAR states that IR&D costs are unallowable;[Footnote 60] however,
according to CGI, CMS did not incorporate the HHSAR clause into CGI's
contract. CGI agreed to prospectively revise its indirect cost rates to
exclude IR&D once they were made aware of the clause. For fiscal year
2005, CMS paid CGI about $953,000 for IR&D costs that were included in
CGI's indirect cost rates. We were unable to calculate the financial
impact prior to fiscal year 2005 because CGI did not separately
quantify the IR&D component of its indirect rates prior to this point.
If CMS failed to include this HHSAR clause in other contracts with CGI
or other contractors, this could result in additional waste.
Conclusions:
CMS management has not allocated sufficient resources, both staff and
funding, to keep pace with recent increases in contract awards and
adequately perform contract and contractor oversight. This poor
operating environment created vulnerabilities in the contracting
process. CMS's preaward contracting practices were driven by expediency
rather than obtaining the best value and minimizing the risk to the
government. Likewise, CMS was not proactive in fulfilling its cognizant
federal agency responsibilities, which not only increased its own risk
but the risk of other agencies that use the same contractors. Further,
significant deficiencies in internal controls over contractor payments,
such as inadequate policies, procedures, and training to guide its
invoice review process, increased the agency's risk of improper
payments. By not timely performing contract closeout audits, CMS may
have missed opportunities to detect and recover improper payments.
Without immediate corrective actions and appropriate high-level
management accountability to fix systemic issues, CMS will continue to
be highly vulnerable to waste and improper payments. Moreover, if these
issues are not promptly corrected, the Medicare claims administration
contracting reform called for in MMA will result in billions of
additional dollars of contracting activities being subject to these
same deficient contracting practices and internal controls, and
exacerbate the potential waste and improper payments.
Recommendations for Executive Action:
We are making the following nine recommendations to the Administrator
of CMS to improve internal control and accountability in the
contracting process and related payments to contractors. We recommend
that the Administrator take the following actions:
* Develop policies and criteria for preaward contracting activities
including (1) appropriate use of competition exemptions such as logical
follow-on agreements, unusual and compelling urgency, and SBA's 8(a)
program; (2) analysis to justify contract type selected, as well as, if
applicable, verification of the adequacy of the contractor's accounting
system prior to the award of a cost reimbursement contract; and (3)
consideration of the extent to which work will be subcontracted.
* Develop policies and procedures to help ensure that cognizant federal
agency responsibilities are performed, including (1) monitoring CAS
compliance, (2) a mechanism to track contractors for which CMS is the
cognizant federal agency, and (3) coordination efforts with other
agencies.
* Develop agency-specific policies and procedures for the review of
contractor invoices so that key players are aware of their roles and
responsibilities, including (1) specific guidance on how to review key
invoice elements; (2) methods to document review procedures performed;
and (3) consideration to circumstances that may increase risk, such as
contract type or complex subcontractor agreements.
* Prepare guidelines to contracting officers on what constitutes
sufficient detail to support amounts billed on contractor invoices to
facilitate the review process.
* Establish criteria for the use of negative certification in the
payment of a contractor's invoices to consider potential risk factors,
such as contract type, the adequacy of the contractor's accounting and
billing systems, and prior history with the contractor.
* Provide training on the invoice review policies and procedures to key
personnel responsible executing the invoice review process.
* Create a centralized tracking mechanism that records the training
taken by personnel assigned to contract oversight activities.
* Develop a plan to reduce the backlog of contracts awaiting closeout.
* Review the questionable payments identified in this report to
determine whether CMS should seek reimbursement from contractors.
Agency Comments and Our Evaluation:
In written comments on a draft of this report (reprinted in their
entirety in appendix III), CMS stated that it would take action on each
of our recommendations and described steps taken and others planned to
address our recommendations. At the same time, CMS disagreed with some
of our findings. Where appropriate, we incorporated changes to our
report to provide additional clarification.
In its comments, CMS stated that the contract actions we reviewed were
not representative of CMS's normal contracting procedures and stated
that the unique circumstances of the implementation of MMA, including
the unusually short implementation period, required it to complete an
unusually large number of contract actions on the basis of other than
full and open competition. We acknowledge that the time frames for
implementing MMA added schedule pressures for CMS. At the same time,
the compressed time frames and the resulting contracting practices
added risk to the contracting process. Many of the findings in our
report are a result of the increased risk together with inadequate
compensating controls to mitigate risk.
Further, in its comments, CMS disagreed with our finding that it made
nearly $90 million in questionable payments. CMS also stated its belief
that it was appropriate for contracting officers to approve invoices
for payment based on the information provided with the invoices, and
that the payments were interim payments that would be audited at a
later date. CMS also stated that the questionable payments we
identified were based on our review of the contractors' books and
records rather than the invoice amounts. CMS stated that it is
premature to conclude that questionable payments exist because it has
not conducted a detailed audit of the invoices for the contracts in
question.
We disagree. We found amounts that were clearly questionable. Our
report also clearly states that in some cases, due to the facts and
circumstances involved, we were unable to determine whether or to what
extent the costs we questioned were allowable, reasonable, and
allocable. As a result, some portion of the total amount of
questionable payments we identified ultimately may be determined by CMS
to be allowable. However, we also state that given CMS's poor control
environment and the fact that our work was not designed to identify all
questionable payments made by CMS or to estimate their extent, other
questionable payments may have been made.
Further, CMS did not always ensure that contractors provided adequate
detail supporting the invoices to allow responsible CMS personnel to
sufficiently review and approve invoices. Regarding contract audits,
CMS had not demonstrated a willingness to allocate the necessary
funding; thus audits have not taken place in a timely manner. In
addition, while we agree that an audit of contract costs can provide a
detective control to help determine whether contractor costs were
proper, CMS's reliance on an after-the-fact audit is not an acceptable
substitute for the real-time monitoring and oversight of contractor
costs--preventative controls--that we recommend in this report.
Effective internal control calls for a sound, ongoing invoice review
process as the first line of defense in preventing unallowable costs
and improper payments. Finally, many of the questionable payments we
identified were based on our review of invoices and documentation
received by CMS at the time of payment and did not require additional
detail from the contractors' books and records. For example, our
findings regarding indirect costs, labor categories, and unallowable
travel costs could have been identified by CMS with an adequate review
of the invoices and information they received from the contractors.
In response to our recommendations to improve controls over its
contracting process and related payments, CMS stated in its comments
that it has taken or will take the following actions:
* continue to evaluate and update its policies and procedures to make
appropriate changes,
* review its policies and criteria for the use of cost reimbursement
contracts and the need for approved accounting systems,
* review and update policies and procedures as appropriate and provide
training regarding subcontracting,
* develop appropriate procedures to support HHS in its cognizant
federal agency functions,
* update its invoice review and payment policies and procedures as
necessary,
* develop comprehensive training on the invoice review and approval
process,
* require the use of a governmentwide system to track the training
taken by personnel assigned to contract oversight,
* continue to reduce its backlog of contracts awaiting closeout, and:
* obtain contract audits related to our identified questionable
payments and seek reimbursement for any costs found to be unallowable.
In addition, our responses to a number of specific CMS comments are
annotated and included at the end of appendix III.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from its date. At that time, we will send copies to the Secretary of
Health and Human Services, Administrator of the Centers for Medicare
and Medicaid Services, and interested congressional committees. Copies
will also be available to others upon request. In addition, the report
will be available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact me at (202) 512-9471 or franzelj@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Major contributors to this report are
acknowledged in appendix IV.
Signed by:
Jeanette M. Franzel:
Director:
Financial Management and Assurance:
[End of section]
Appendix I: Questionable Payments to Contractors:
As shown in table 4, we identified numerous questionable payments
totaling nearly $90 million that represent potentially improper,
unsubstantiated, or wasteful payments. In some cases, due to the facts
and circumstances involved, we were unable to determine whether or to
what extent the costs were allowable, reasonable, and allocable. As a
result, some portion of the total amount of questionable payments we
identified ultimately may be determined by the Centers for Medicare and
Medicaid Services (CMS) to be allowable and therefore not recoverable
from the contractor. Given CMS's poor control environment and the fact
that our work was not designed to identify all questionable payments
made by CMS or to estimate their extent, other questionable payments
may have been made.
Table 4: Questionable Payments by Contractor (Dollars in thousands):
Contractor: BearingPoint;
Costs not compliant with contract terms: [Empty];
Unsupported contractor costs: $388;
Potential waste: [Empty];
Less overlapping amounts[A]: [Empty];
Total: $388.
Contractor: Booz Allen Hamilton, Inc.;
Costs not compliant with contract terms: $208;
Unsupported contractor costs: 60;
Potential waste: [Empty];
Less overlapping amounts[A]: [Empty];
Total: 268.
Contractor: CGI Federal;
Costs not compliant with contract terms: 1,894;
Unsupported contractor costs: 5;
Potential waste: $1,373;
Less overlapping amounts[A]: $(631);
Total: 2,641.
Contractor: International Business Machines, Corp.;
Costs not compliant with contract terms: 4,720;
Unsupported contractor costs: [Empty];
Potential waste: 909;
Less overlapping amounts[A]: (1,140);
Total: 4,489.
Contractor: Iowa Foundation for Medical Care;
Costs not compliant with contract terms: 23;
Unsupported contractor costs: 49;
Potential waste: [Empty];
Less overlapping amounts[A]: [Empty];
Total: 72.
Contractor: Ketchum, Inc.;
Costs not compliant with contract terms: 9;
Unsupported contractor costs: 1,324;
Potential waste: [Empty];
Less overlapping amounts[A]: (5);
Total: 1,328.
Contractor: Maximus, Inc.;
Costs not compliant with contract terms: 16;
Unsupported contractor costs: 2;
Potential waste: [Empty];
Less overlapping amounts[A]: [Empty];
Total: 18.
Contractor: NCS Pearson, Inc;
Costs not compliant with contract terms: [Empty];
Unsupported contractor costs: [Empty];
Potential waste: 630;
Less overlapping amounts[A]: [Empty];
Total: 630.
Contractor: Palmetto GBA;
Costs not compliant with contract terms: 16,184;
Unsupported contractor costs: 51,181[B];
Potential waste: 3,622;
Less overlapping amounts[A]: (3,304);
Total: 67,683.
Contractor: TrailBlazer Health Enterprises, LLC;
Costs not compliant with contract terms: 1,441;
Unsupported contractor costs: 9,697;
Potential waste: [Empty];
Less overlapping amounts[A]: [Empty];
Total: 11,138.
Contractor: ViPS;
Costs not compliant with contract terms: 10;
Unsupported contractor costs: [Empty];
Potential waste: [Empty];
Less overlapping amounts[A]: [Empty];
Total: 10.
Contractor: Z-Tech Corporation;
Costs not compliant with contract terms: [Empty];
Unsupported contractor costs: [Empty];
Potential waste: 91;
Less overlapping amounts[A]: [Empty];
Total: 91.
Contractor: Total;
Costs not compliant with contract terms: $24,505;
Unsupported contractor costs: $62,706;
Potential waste: $6,625;
Less overlapping amounts[A]: $(5,080);
Total: $88,756.
Source: GAO analysis of contractor invoices and data.
[A] In certain instances, a portion of a questionable payment may fall
into more than one category (i.e., a payment may be both potential
waste and not compliant with contract terms). Therefore, to avoid
double counting questionable payment amounts, we reduced the gross
questionable payment amount by the overlapping amount ($5.08 million).
[B] This amount includes $10.2 million of costs that Palmetto could not
adequately support under its subcontract with NCS Pearson.
[End of table]
Because CMS sometimes used other funding sources in addition to
Medicare Prescription Drug, Improvement, and Modernization Act of 2003
(MMA) funds to pay invoices for one contract, we were not always able
to identify specific costs that were paid with MMA funds. As a result,
the scope of our review extended beyond payments made with MMA funds
for some contracts and the questionable payments we identified may not
have been paid solely with MMA funds.
[End of section]
Appendix II: Scope and Methodology:
To determine how the Centers for Medicaid and Medicare Services (CMS)
used the $1 billion Medicare Prescription Drug, Improvement, and
Modernization Act of 2003 (MMA) appropriation, we obtained obligation
and disbursement transactions from CMS's financial systems from the
period January 2004 through December 2006 that CMS charged against the
MMA appropriation. We scanned these data files for obvious omissions or
errors in key data fields. To verify the completeness of the files, we
reconciled the total obligated amount to the MMA appropriation and
reconciled the liquidated obligation amount (a field within the
obligation data file) to the disbursement data totals. To determine the
recipients of the MMA appropriation, we categorized disbursement data
by payee category (contractors, government agencies, state government
agencies, etc.) based upon the vendor name in the file. Because CMS
recorded about $536 million of its disbursement to one budget object
code, "other services," we were unable to use CMS's budget object codes
to determine the services provided by contractors and vendors.
Therefore, to categorize expenditures to contractors and vendors by
activity (information technology, 1-800-MEDICARE help line, etc.), we
reviewed the project titles in CMS's contracts database for all
contracts[Footnote 61] with total disbursements greater than $1
million; if the contract title was unclear, we reviewed the statement
of work in the contract file. We also categorized some additional
contracts based on our detailed review of selected contractors.
To identify additional details on the services obtained with MMA funds,
we (1) analyzed contract files including statements of work, (2)
analyzed interagency agreements, (3) discussed employee-related costs
with CMS officials, (4) discussed payments to state agencies with CMS
officials overseeing the State Health Insurance Assistance Program as
well as certain state agency officials, and (5) analyzed purchase card
transaction statements and supporting receipts and discussed these
purchases with applicable CMS officials.
To determine whether CMS's contracting practices and related internal
controls are adequate to avoid waste and to prevent or detect improper
payments, we interviewed CMS officials including contracting officers,
contracting specialists, project officers, cost/price team members,
financial management officials, and Office of Acquisition and Grants
Management (OAGM) management about oversight responsibilities;
analyzed contract files and invoices; and assessed the sufficiency of
CMS policies, procedures, and training. As criteria, we used our
Standards for Internal Control in the Federal Government[Footnote 62]
and the Federal Acquisition Regulation (FAR). We focused our internal
control work on the contractors that received the most MMA funding,
based on the CMS disbursement data. We also selected contractors with
other risk factors such as billing or accounting system problems for
review. Our approach resulted in the selection of 16 contractors. For
these 16 contractors, we then selected contracts to use for our work
based on contracts that were funded with at least $1.5 million of the
MMA appropriation.[Footnote 63] As a result, we nonstatistically
selected 16 contractors and 67 contracts with a total contract value of
$1.6 billion. One contract selected was a Medicare contract. Because
Medicare contracts were not subject to FAR, we did not include this
contract in our internal control review. Therefore we evaluated CMS
contracting practices and related internal controls for 66 contracts.
Additionally, we obtained from CMS information related to oversight
resources from fiscal year 1997 through 2006, the closeout backlog, and
its cognizant federal agency duties. We discussed cognizant federal
agency oversight activities with and obtained documentation such as
indirect cost rate agreements or audit reports from the National
Institutes of Health and the Defense Contract Audit Agency.
To determine whether payments to contractors were properly supported as
a valid use of government funds, we started with the same 67 contracts
we had nonstatistically selected. We further refined the list of 67
contracts based on individual contract values and other risk factors
such as contract type to arrive at a selection of 47 contracts for
which we reviewed CMS payments to contractors. Because CMS sometimes
used other funding sources in addition to MMA to pay invoices for one
contract, we were not always able to identify specific costs that were
paid with MMA funds. As a result, the scope of our review extended
beyond payments made with MMA funds. This nonstatistical selection
methodology resulted in a selection of CMS payments to contractors
totaling $595.4 million, of which $355.5 million was paid with MMA
funds. The following table summarizes the number of contracts and
amounts of CMS payments to contractors included in our review, as well
as the amount paid with MMA funds.
Table 5: Contracts and Amounts Included in Our Review of CMS Payments
(Dollars in thousands):
Contractor: BearingPoint;
Number of contracts reviewed: 5;
Contract payment amounts: $4,678;
Amount paid with MMA funds: $4,106.
Contractor: Booz Allen Hamilton;
Number of contracts reviewed: 4;
Contract payment amounts: 7,532;
Amount paid with MMA funds: 8,185.
Contractor: CGI;
Number of contracts reviewed: 6;
Contract payment amounts: 43,160;
Amount paid with MMA funds: 25,742.
Contractor: Computer Sciences Corporation;
Number of contracts reviewed: 2;
Contract payment amounts: 23,992;
Amount paid with MMA funds: 18,877.
Contractor: IBM;
Number of contracts reviewed: 2;
Contract payment amounts: 7,042;
Amount paid with MMA funds: 9,678.
Contractor: Iowa Foundation for Medical Care;
Number of contracts reviewed: 2;
Contract payment amounts: 19,795;
Amount paid with MMA funds: 13,544.
Contractor: Ketchum;
Number of contracts reviewed: 9;
Contract payment amounts: 54,442;
Amount paid with MMA funds: 47,285.
Contractor: Maximus;
Number of contracts reviewed: 1;
Contract payment amounts: 6,317;
Amount paid with MMA funds: 6,301.
Contractor: Northrop Grumman;
Number of contracts reviewed: 4;
Contract payment amounts: 24,373;
Amount paid with MMA funds: 16,927.
Contractor: Palmetto;
Number of contracts reviewed: 3;
Contract payment amounts: 182,526;
Amount paid with MMA funds: 80,158.
Contractor: Pearson;
Number of contracts reviewed: 1;
Contract payment amounts: 180,011;
Amount paid with MMA funds: 89,893.
Contractor: Trailblazer;
Number of contracts reviewed: 2;
Contract payment amounts: 12,564;
Amount paid with MMA funds: 7,393.
Contractor: ViPS;
Number of contracts reviewed: 2;
Contract payment amounts: 19,305;
Amount paid with MMA funds: 18,172.
Contractor: Z-Tech;
Number of contracts reviewed: 4;
Contract payment amounts: 9,634;
Amount paid with MMA funds: 9,247.
Contractor: Total;
Number of contracts reviewed: 47;
Contract payment amounts: $595,371;
Amount paid with MMA funds: $355,508.
Source: GAO analysis of contractor invoices and data.
[End of table]
For the 47 contracts, we performed forensic auditing techniques, data
mining, and document analyses to select contractor costs billed to CMS
to test. Because we selected individual or groups of transactions for
detailed testing to determine whether costs were allowable, the amount
of contract payments we tested was lower than the amount of payments
included in our review shown in table 5. Following is a description of
the types of procedures we used to test transactions.
* Labor costs: We obtained from contractors their databases of hours
charged to CMS that included detailed information such as employee
name, hours worked per pay period, and pay rate information. Using this
information, we selected labor transactions for testing based on
quantitative factors such as (1) number of hours worked, (2) dollar
amount billed, (3) labor rates, or (4) anomalies in the data. For these
nonstatistical selections, we compared the information to supporting
documentation obtained from the contractor, including time sheets and
payroll registers and discussed billed amounts with contractor
officials.
* Subcontractor, travel, and other direct costs: When contractor
invoices did not provide sufficient information, we obtained additional
information from the contractor, such as databases of transaction-level
detail, to select specific transactions based on criteria such as
amount billed, vendor names, and potential duplicate payments. We
compared our nonstatistical selections to applicable supporting
documentation such as vendor invoices, travel vouchers and receipts,
and subcontract agreements provided by the contractor.
* Indirect costs: We verified the appropriateness of indirect costs
billed by recalculating the amounts and comparing the rates billed to
provisional and final indirect cost rates and contract ceilings.
* Analytical procedures: We performed a variety of analytical
procedures including recalculating invoice line items for mathematical
accuracy and reviewing invoice amounts for trends and anomalies.
We questioned payments for costs that were potentially improper by
assessing whether the costs did not comply with the terms of the
contract or applicable regulation (FAR, the Health and Human Services
Acquisition Regulation, and Federal Travel Regulation) or that were
unsubstantiated because the contractor did not provide adequate support
for us to determine whether the costs were allowable. In addition, we
questioned payments for which we had concerns that risks in CMS's
contracting practices may have resulted in waste. When calculating our
questionable payment amounts, where applicable for costs not compliant
with contract terms and regulations we added the respective indirect
costs that the contractor charged on the item in question. For some of
the questionable payments we identified, a portion of the cost is most
likely appropriate; however, because of certain facts and circumstances
involved, we were unable to determine whether or to what extent the
costs were allowable, reasonable, and allocable. Therefore, we
questioned the entire amount associated with the uncertainties.
Because CMS sometimes used other funding sources in addition to MMA to
pay invoices, the scope of our review extended beyond the payments made
with MMA funds. Therefore, questionable payment amounts do not relate
exclusively to MMA funds. While we identified some payments as
questionable, our work was not designed to identify all questionable
payments or to estimate their extent.
We provided CMS a draft of this report for review and comment. CMS
provided written comments, which are reprinted in appendix III of this
report. We also discussed with CMS contractors any findings that
related to them. We conducted this performance audit in accordance with
generally accepted government auditing standards. Those standards
require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions
based on our audit objectives. We conducted our audit work in
Washington D.C. and Baltimore, Maryland from March 2006 through
September 2007.
[End of section]
Appendix III: Comments from the Centers for Medicare and Medicaid
Services:
[Note: GAO comments supplementing those in the report text appear at the
end of this appendix]
Department Of Health & Human Services:
Centers for medicare & Medicaid Services:
Office of the Administrator:
Washington, DC 20201:
Date: November 6, 2007:
TO: Jeanette Franzel:
Director:
Financial Management and Assurance:
Government Accountability Office:
From: Kerry Weems: [signature included]
Acting Administrator:
Subject: Government Accountability Office Draft Report: "Internal
Control Deficiencies Resulted in Millions of Dollars of Questionable
Contract Payments," (GAO-08-54):
Thank you for the opportunity to review and comment on the draft
Government Accountability Office (GAO) report. The Centers for Medicare
& Medicaid Services (CMS) appreciates the insights GAO provides
regarding CMS' contracting processes and procedures.
The CMS awards and administers contracts in full compliance with
applicable statutes and regulations. We further conduct our contracting
operations with the highest degree of integrity.
While our agency will take action on each of the nine GAO
recommendations, we assert that the contract actions reviewed by GAO
are not, in fact, representative of CMS' normal contracting procedures.
The unique circumstances of the implementation of the MMA dictated
approaches that are not part of our current contracting procedures.
Recognizing the unusually short implementation period, Congress gave
CMS the authority to deviate from our usual practices. In fact, 2007
CMS has been exemplary in its use of competitive contracts. [See
comment 1 and 2]
Moreover, we disagree with GAO's conclusion that $90 million in
questionable payments were made to contractors. As we will discuss, CMS
has not performed incurred cost audits of the contracts in question nor
made a final determination as to the amount of payments owed to the
contractors. [See comment 1]
In conducting its review, GAO examined a very small sample of CMS'
contract actions required to meet the mandates of the Medicare
Prescription Drug, Improvement, and Modernization Act of 2003 (MMA),
Pub. L. No. 108-173 (Dec. 8, 2003). There were many unique factors that
affected MMA contracting actions during calendar years 2004 and 2005,
when the Agency was establishing the prescription drug program and
implementing other requirements of the MMA. [See comment 3]
In the "Conclusion" section of the report, GAO suggests that if the
problems noted in its report are not promptly corrected, there may be
issues with the Medicare claims administration contracting reform
called for in the MMA. The Medicare Administrative Contracts (MAC),
which are being awarded on the basis of full and open competition in
accordance with the requirements of section 911 of the MMA, fully
comply with all applicable statutes and regulations. Safeguards have
been put into place to assure that payments to the MACs are
appropriate, and that these contracts are administered in strict
accordance with applicable contracting requirements.
With respect to the recommendations contained in GAO's draft report, we
are providing the following responses:
GAO Recommendation Number 1:
Develop policies and criteria for pre-award contracting activities
including (1) appropriate use of competition exemptions such as logical
follow-on agreements, unusual and compelling urgency, and SBA's 8(a)
program; (2) analysis to justify contract type selected, as well as, if
applicable, verification of the adequacy of the contractor's accounting
system prior to the award of a cost reimbursement contract; and (3)
consideration of the extent to which work will be subcontracted.
CMS Response:
(1) The first recommendation, regarding the appropriate use of
competition exemptions, stems from GAO's finding that a large
percentage of contract actions necessary to implement the MMA were
awarded on a noncompetitive basis. Admittedly, CMS was required to
complete an unusually large number of contract actions, necessary to
meet MMA requirements, on the basis of other than full and open
competition. Many of these contract actions were required to implement
the prescription drug program. This is an extremely large and complex
program. Congressionally mandated dates for the implementation of MMA
requirements did not afford CMS sufficient time to compete contracts. A
prime example is when CMS had to develop new applications to meet
information technology needs. There simply was not sufficient time to
develop entirely new systems and applications. Therefore, CMS found it
necessary to modify existing systems and applications in order to
develop the information technology infrastructure required for the
prescription drug program.
Congress recognized the extraordinary circumstances under which CMS
would have to award the contracts necessary to implement the programs
established in the MMA. Therefore, Congress specifically provided, in
section 1857(c)(5) that: [See comment 2]
Contracting Authority – The authority vested in the Secretary by this
part may be performed without regard to such provisions of law or
regulations relating to the making, performance, amendment, or
modification of contracts of the United States as the Secretary may
determine to be inconsistent with the furtherance of this title.
The CMS developed a policy for the use of the authority in section
1857(c) to enter into a Medicare Advantage Contract on the basis of
other than full and open competition. That policy provided that CMS
would only rely upon section 1857(c) 5) if no exceptions to competition
under the Federal Acquisition Regulations (FAR) supported a
noncompetitive contract award. CMS did not find it necessary to award
any Medicare Advantage Contracts pursuant to the authority of section
1857(c)(5) because the FAR provided authority for the noncompetitive
contract actions required to implement the MMA.
On page 23 of the draft report, GAO states "that about 45 percent of
the contracts included in our review (representing about $499.1 M in
total contract value) were awarded without the benefit of competition."
In fiscal year (FY) 2007, CMS executed 2,489 contract actions resulting
in the obligation of $1.943 billion. Twenty-one of these contracts were
awarded on a non-competitive basis under FAR Part 6 in the total amount
of $255 million. Hence, less than 1 percent of CMS' contract actions
and approximately 13 percent of the contracted dollars, were awarded on
a noncompetitive basis, under FAR Part 6 in FY 2007. For FY 2008, the
Department has established a goal that at least 75 percent of awarded
dollars, or 60 percent of contract actions, be processed on the basis
of competition. CMS substantially exceeds these goals. Indeed, CMS has
an exceptional record for awarding contracts on the basis of full and
open competition. [See comment 4]
On page 25 of the draft report, GAO also states, "About 24 percent of
the contracts and task orders in our review, with a total value of
nearly $390 million, were issued with no competition as a logical
follow-on to a prior task order." In FY 2007, CMS only awarded 10 task
orders as a logical follow-on, which is .004 percent of all contract
actions, in the total amount of $2.3 million, or approximately 1
percent of the total dollars obligated. The extent of use of logical
follow-on task orders to implement the MMA in the contracts sampled is
not indicative of CMS' award of logical follow-on task orders in
general. [See comment 4]
In addition, GAO recommends that CMS develop policies and criteria for
the award of contracts pursuant to the Small Business Administration's
8(a) program. CMS is required to utilize small disadvantaged businesses
in the 8(a) program to the maximum extent possible. The Department of
Health and Human Services (DHHS) has established a goal that CMS award
5.5 percent of its total contract dollars to 8(a) firms, and there is
an expectation that CMS will significantly exceed that goal. The 8(a)
program is the cornerstone of the Government's initiatives for
increasing small business participation in Government contracting.
Thus, pursuant to the authority of the 8(a) program, we are required to
award contracts to small and disadvantaged businesses to the maximum
possible extent.
The fundamental procedures for the award of non-competitive contracts
are contained in the FAR and the Department of Health and Human
Services Acquisition Regulation (HHSAR). We also have in place CMS-
specific procedures for use of competition exemptions. For example,
Justifications for Other Than Full and Open Competition (JOFOC), which
are based upon unusual and compelling circumstances, must be reviewed
by the Office of the General Counsel to ensure they are legally
sufficient. In addition, CMS' Competition Advocate reviews and approves
all JOFOCs over $500,000. These measures provide added safeguards to
assure that CMS awards contracts on the basis of competition to the
maximum possible extent.
We agree with GAO that the award of contracts on a competitive basis is
essential to assuring the integrity of the contracting process.
Therefore, we will continue to evaluate and update our policies and
procedures and make appropriate changes. We will also address
competitive contracting requirements in our training to assure that
CMS' acquisition workforce is fully aware of the requirements for the
competitive award of contracts.
(2) On page 25 of the draft report GAO states: "We found that about 78
percent of the contracts we reviewed were cost reimbursement contracts.
These cost reimbursement contracts had a total contract value of $1.2
billion." However, for the contracts in question, CMS had to utilize
cost-reimbursement contracts. [See comment 5]
The FAR section 16.202 states that a firm-fixed-price contract is
appropriate for supplies or services which are to be acquired on the
basis of "reasonably definite functional or detailed specifications."
The prescription drug program was an entirely new initiative. CMS had
no prior experience with this program. CMS did not have extensive
expertise among its staff for implementing the prescription drug
program. CMS could not develop statements of work for MMA requirements
that were definite enough to allow for a fixed-price contract. In FY
2007, approximately 30 percent of CMS contract actions, accounting for
just over 50 percent of the total dollars awarded, were for cost-
reimbursement type contracts. Given the constant changes associated
with the Medicare program, and the difficulty in precisely defining the
Agency's needs, we believe these figures show that CMS employs cost-
reimbursement type contracts to an appropriate extent.
On page 26 of the draft report, GAO notes instances where it believes
CMS awarded contracts to entities that did not have an acceptable
accounting system. In fact, based upon past audits by the Defense
Contract Audit Agency (DCAA), CMS believes that the contractors in
question, including Palmetto, IFMC, Ketchum, NCS Pearson, Trailblazer,
and ViPS, did have acceptable accounting systems. Hence, the
information in the chart on page 20, to the effect that these
contractors did not have approved accounting systems, is not accurate.
CMS Contracting Officers are sensitive to the requirement that a
contractor have an acceptable accounting system prior to being awarded
a cost reimbursement contract. [See comment 6]
The use of the correct contract type is critical to the award of a
contract, as is assuring that a contractor has an approved accounting
system. Therefore, in response to GAO's recommendations, we intend to
review our policies and criteria for the use of cost reimbursement
contracts and the need for approved accounting systems and will update
those polices as necessary. We will also provide appropriate training
to CMS staff.
(3) With respect to subcontracted work, CMS awarded contracts that
resulted in extensive subcontracting efforts because the skills
required to perform the work were not readily available from a single
contractor. GAO questioned the utilization of subcontractors under
certain CMS contracts. For example, on page 27 of the draft report, GAO
indicates that under a task order with Ketchum, 97 percent of the total
costs went to subcontractors. The report further questions the level of
profit paid to Ketchum.
However, a principal purpose of the task order was to secure television
advertising time for the Medicare education campaign. Hence, this work
had to be subcontracted. Television advertising requires upfront
payments. Ketchum financed millions of dollars to make certain that
CMS' advertisements ran on network and cable television. Ketchum,
therefore, assumed an inordinate amount of costs in disbursing funds
for television advertising on the Government's behalf, as well as risk
in performing this work. The fact that Ketchum financed these millions
of dollars and oversaw the process of getting the ads to the airwaves
was the rationale for determining that a 2 percent profit factor for
subcontracted work was fair and reasonable.
The GAO also questioned subcontracting arrangements between Pearson and
Palmetto for the operation of the Medicare call center. However, the
volume of calls received from beneficiaries increased exponentially as
a result of the implementation of the prescription drug and Medicare
Advantage programs. It was necessary for Pearson and Palmetto to work
in tandem and to balance calls between their respective operations in
order to provide acceptable service to the public.
We appreciate the importance of assuring that contract work is
performed appropriately and that profits are not excessive. We will
therefore review and update our policies and procedures regarding the
review and approval of subcontracts as appropriate. We will also
provide training to staff on subcontracting requirements.
GAO Recommendation Number 2:
Develop policies and procedures to govern CMS' cognizant federal agency
responsibilities, including (1) monitoring CAS compliance, (2)
mechanism to track contractors for which CMS is the cognizant federal
agency, and (3) coordination efforts with other agencies.
CMS Response:
We agree that processes and procedures for performance of cognizant
Federal agency responsibilities need to be strengthened. We have had
ongoing discussions with DHHS regarding audit cognizance. Section
42.003 of the FAR provides that "the cognizant Federal agency normally
will be the agency with the largest dollar amount of negotiated
contracts." Based upon discussions with DHHS, we understand that DHHS
is the "cognizant Federal agency." CMS is an Operating Division of DHHS
and is not a "Federal agency." Hence, CMS cannot independently perform
cognizant Federal agency contracting functions. [See comment 7]
Part of the confusion surrounding audit cognizance stems from section
342.705 of the HHSAR, which provides that "The Division of Financial
Advisory Services of the National Institutes of Health has the
authority to establish indirect cost rates, fringe benefit rates, etc.,
for use in contracts and grants awarded to commercial organizations."
To date, NIH generally has not been able to perform this function.
Therefore, we recognize the need to work with DHHS to establish
policies and procedures for the performance of cognizant Federal agency
functions. To the extent that CMS is designated to perform functions in
supporting DHHS as the cognizant Federal agency, we will develop
appropriate procedures for monitoring Cost Accounting Standard (CAS)
compliance and for coordinating efforts with other agencies.
GAO Recommendation Number 3:
Develop agency-specific policies and procedures for the review of
contractor invoices so that key players are aware of their roles and
responsibilities, including (1) specific guidance on how to review key
invoice elements; (2) methods to document review procedures performed;
and (3) consideration to circumstances that may increase risk, such as
contract type or complex subcontractor agreements.
CMS Response:
The CMS Acquisition Policy Number 16, entitled "Invoice Payment
Procedures," was issued in August 2005. The purpose of this Acquisition
Policy was to promulgate specific policies and procedures for invoice
review and payment. CMS will review Acquisition Policy Number 16 and
will amend its policies and procedures as necessary to assure that key
players understand their roles and responsibilities. Also, CMS is
coordinating with the Department in the sharing of "best practices"
which may lead to the development of Department-wide standardized
policies and procedures for invoice review and payment. We recently
provided comprehensive training to CMS Project Officers regarding
invoice review and will continue our efforts to train both Project
Officers and Office of Acquisition and Grants Management contracting
staff. [See comment 8]
It should be noted, however, that with respect to our most significant
contracts, such as contracts with the MACs, Program Safeguard
Contractors, Quality Improvement Organizations, and Qualified
Independent Contractors, as well as the Health Insurance General Ledger
Accounting System, the contact center and significant IT contracts, we
have established very comprehensive processes and procedures for the
review and approval of invoices. We have gone so far as to develop
software that is used to analyze the invoices under most of these
contracts. A preponderance of the funds that CMS obligates to contracts
is expended under these major contracting efforts.
GAO Recommendation Number 4:
Prepare guidelines to contracting officers on what constitutes
sufficient detail to support amounts billed on contractor invoices to
facilitate the review process.
CMS Response:
As stated above, CMS will review its current invoice review policies
and procedures and will make appropriate revisions. Moreover, CMS
intends to develop a guide for both Project Officers and Contracting
Officers for the review and approval of contractor invoices. This will
provide for more consistency in the review of invoices.
GAO Recommendation Number 5:
Establish criteria for the use of negative certification in the payment
of contractor's invoices to consider potential risk factors, such as
contract type, the adequacy of the contractor's accounting and billing
systems, and prior history with the contractor.
CMS Response:
The negative certification process was established to assure that CMS
would meet the requirements of the Prompt Payment Act. Under this
process, Project Officers and Contracting Officers were nonetheless
required to thoroughly review invoices. We are constantly providing
training and direction to Project Officers and Contracting Officers
assure that they review invoices appropriately. We recognize, however,
that absent documentation supporting the approval of invoices, there is
no evidence to support the extent and appropriateness of invoice review
and approval. Therefore, we intend to revise our procedures to develop
a documentation trail that will support that an invoice was
appropriately reviewed and may properly be paid.
GAO Recommendation Number 6:
Provide training on the invoice review policies and procedures to key
personnel responsible for executing the invoice review process.
CMS Response:
As previously mentioned, we intend to develop comprehensive training
for Project Officers and Contracting Officers on invoice review
policies and procedures. A training session was held recently on
October 16, 2007, which was attended by approximately 300 Project
Officers. The training addressed the review and approval of invoices.
GAO Recommendation Number 7:
Create a centralized tracking mechanism that records the training taken
by personnel assigned to contract oversight activities.
CMS Response:
A Government-wide system was recently established for tracking the
training taken by personnel assigned to contract oversight activities.
The Acquisition Career Management Information System (ACMIS) is a
centralized tracking mechanism used by all Federal agencies for
maintaining the training records of personnel assigned to contract
oversight activities. ACMIS provides a database on the training,
education, certification, and other information on an agency's
acquisition workforce including both Project Officers and Contracting
Officers. Use of ACMIS is mandatory for all CMS Project Officers and
contracting staff.
GAO Recommendation Number 8:
Develop a plan to reduce the backlog of contracts awaiting closeout.
CMS Response:
The CMS developed a plan for reducing the backlog of contracts awaiting
closeout and successfully implemented the plan in FY 2007. It proved to
be a very effective strategy for reducing CMS' backlog of contracts
awaiting closeout. At the beginning of FY 2007, CMS had 590 contracts
that were overdue for closeout. By the end of FY 2007, CMS had reduced
the number of contracts overdue for closeout to 407. This was a 30
percent reduction in contracts that were overdue for closeout. In FY
2008, CMS fully expects to continue this trend and further reduce the
backlog.
GAO Recommendation Number 9:
Review the questionable payments identified in this report to determine
whether CMS should seek reimbursement from contractors.
CMS Response:
This recommendation stems from GAO's finding that CMS made nearly $90
million in questionable payments to contractors. We disagree with this
finding. The contracts in question were cost-reimbursement contracts.
The payments to the contractors were interim payments under those
contracts. The payments were made strictly on the basis of the
contractor invoices and the documentation provided in connection with
those invoices. Based upon the information the contractors provided in
support of the payments, it was entirely appropriate for the
Contracting Officers to approve the invoices for payment. [See comment
1]
GAO found that the payments were questionable not based upon its review
of the invoices, which served as the Contracting Officers' basis for
the approval of the interim payments, but instead based its review upon
the contractors books and records. CMS will obtain audits of all costs
claimed for reimbursement under these contracts and will obtain the
repayment of any costs that are found to be unallowable. It is
premature to conclude that CMS has made any questionable payments, as
there has not yet been a determination of the proper amount of
reimbursement under these contracts. [See comment 1]
In fact, it is entirely likely that most of the contractors invoiced
costs will be found to be allowable. Specifically, on page 36 of the
draft report, GAO questioned $16.2 million in indirect costs paid to
Palmetto on the basis that the costs exceeded the contract ceiling
rates. On pages 39-40 of the draft report, GAO questioned $40.6 million
that was paid to Palmetto but GAO found that there were issues with
Palmetto's ability to record and bill costs. These two cost elements
comprise more than over 60 percent of the costs which GAO questioned.
The questioned costs were incurred in the performance of Palmetto's
call center contract. This contract was critical to the successful
implementation of MMA. Palmetto served as one of the main sources of
information for Medicare beneficiaries regarding the prescription drug
benefit and the Medicare Advantage program. The Contracting Officer had
documentation from DCAA finding Palmetto's accounting system to be
adequate for the award of a cost-reimbursement contract. In performing
this contract, Palmetto was in the process of converting from the
accounting practices under its Medicare intermediary and carrier
contracts to an accounting system that complied with the Cost
Accounting Standards (CAS). In making the conversion to a CAS compliant
system, costs that were previously charged directly under the
intermediary and carrier contracts were moved into indirect cost pools,
and other changes were made to Palmetto's methodologies for
accumulating and reporting costs.
The Contracting Officer was aware of the transition that Palmetto was
undergoing in becoming CAS compliant and was working in good faith to
assist Palmetto in making the conversion to CAS. The Contracting
Officer reviewed the invoices, in concert with program staff, and
approved the payments based upon the information presented in the
invoice. The conversion to a CAS compliant system does not mean that
the charges to the contract were inappropriate. CMS will audit the
costs incurred by Palmetto and will finalize indirect cost rates for
the periods in question for both contractors, and will recoup any costs
that are determined to be unallowable.
On page 42 of the draft report, GAO indicates that Trailblazers did not
provide adequate documentation to support $10.3 million of invoiced
costs. However, the Contracting Officer has been addressing this issue
with Trailblazers, and believes that, in fact, Trailblazers does have
documentation in support of these costs. Hence, we do not believe that
these costs are questionable.
In other instances where CMS was aware that a contractor had billed
inappropriate amounts to its contracts, CMS took action to recover
amounts erroneously billed. For example, when CMS became aware of a
MAXIMUS' billing in excess of the indirect ceiling rates specified in
the contract as is discussed on page 36 of the draft report, CMS
immediately issued a demand letter to MAXIMUS requesting reimbursement
of the inappropriately charged amount. [See comment 9]
In sum, we intend to review all of the contractor costs that have been
questioned in the report in the course of our audits of the
contractors, and to seek reimbursement as appropriate. However, CMS
appropriately approved the interim payments under the contracts in
question.
Thank you again for your review of CMS' MMA-related contract actions.
In response to GAO's recommendations, we will review and amend our
processes and procedures, as appropriate. We will further assure that
CMS contracting staff receives appropriate training on such policies
and procedures.
[End of Comments from CMS]
GAO Comments:
1. See "Agency Comments and Our Evaluation" section.
2. The contracting authority CMS referred to (Section 1857(c)(5))
applies specifically to Medicare Advantage contracts (formerly referred
to as Medicare+Choice contracts) and prescription drug plan contracts
and does not apply to the types of contracts included in our review.
3. As stated in our report, CMS paid $735.4 million of its MMA funds
for start-up administrative costs to contractors and vendors. Our
review included 67 contracts with a total contract value of $1.6
billion, of which $508.4 million was paid with MMA funds. Our sample
covered about 69 percent of the MMA funds paid to contractors and
vendors.
4. CMS compared the percentages of noncompetitively awarded and logical
follow-on task orders that were included in our review to statistics it
calculated for its 2007 contracting actions. The percentages related to
our review are not comparable to the statistics CMS presented primarily
because the percentages were calculated differently. Our percentages
were based solely on the number of contracts in our review and included
several years. Our calculation showed that 45 percent of contracts in
our review were awarded without the benefit of competition. CMS used
fiscal year 2007 contracts, which were outside the scope of our review,
to arrive at a total of $255 million awarded on a noncompetitive basis
for that fiscal year. Furthermore, CMS calculated the percentage of
noncompetitive awards for fiscal year 2007 by comparing the number of
noncompetitive contracts to the total number of contract actions.
Contract actions likely include contract modifications, and one
contract could have several modifications. For example, one of the
large information technology contracts in our review had over one
hundred modifications (contract actions).
5. CMS stated that it had to use cost reimbursement contracts because
MMA was an entirely new initiative. We present the statistics about
cost reimbursement contracts to add perspective due to the increased
risk associated with these types of contracts.
6. As stated in our report, CMS awarded cost reimbursement contracts to
Palmetto despite CMS's own cost/price team's determination that the
contractor had numerous accounting system deficiencies. The chart CMS
referred to is our summary of CMS's fulfillment of its cognizant
federal agency responsibilities. The chart illustrates instances in
which CMS did not sufficiently assess the adequacy of the contractor's
accounting system. The chart is not intended to present a conclusion
about the adequacy of the contractors' accounting systems.
7. Because certain cognizant federal agency oversight responsibilities
at HHS were assigned to CMS, as discussed in our report, we believe it
is CMS's obligation to ensure that those responsibilities are
performed. In addition, we added wording to our report to clarify that
we refer to CMS as the cognizant federal agency in this report because
HHS delegated cognizant federal agency responsibilities to CMS.
8. We modified our report to clarify that we reviewed CMS's Acquisition
Policy - 16 Subject: Invoice Payment Procedures, August 2005.
9. CMS issued the demand letter to Maximus as a result of our
preliminary audit findings.
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Jeanette Franzel, (202) 512-9471, or franzelj@gao.gov:
Acknowledgments:
Staff members who made key contributions to this report include: Marcia
Carlsen (Assistant Director), Richard Cambosos, Timothy DiNapoli, Abe
Dymond, Janice Friedeborn, Leslie Jones, Jason Kelly, Steven Koons,
John Lopez, Meg Mills, Kara Patton, Ronald Schwenn, Omar Torres, Ruth
Walk, and Doris Yanger.
[End of section]
Footnotes:
[1] Pub. L. No. 108-173, 117 Stat 2066 (Dec. 8, 2003).
[2] An obligation is a definite commitment that creates a legal
liability of the government for the payment of goods and services
ordered or received. Payment may be made immediately or in the future.
[3] Waste involves the taxpayers in the aggregate not receiving
reasonable value for money. Importantly, waste involves a transgression
that is less than fraud and abuse. Most waste does not involve a
violation of law or regulation but rather relates to mismanagement or
inadequate oversight.
[4] Improper payments include duplicate payments and miscalculations;
payments for goods or services not rendered; payments resulting from
fraud or abuse; or payments for unallowable costs (contractor costs
that are not allowed under a term or condition of the contract or
pursuant to applicable regulation).
[5] GAO, Standards for Internal Control in the Federal Government, GAO/
AIMD-00-21.3.1 (Washington, D.C.: November 1999).
[6] 48 C.F.R. ch. 1.
[7] For the purposes of this report, the term "contract" is generally
used to refer to both contracts and task orders issued under contracts.
We use the term "task order" when we discuss an issue or a requirement
that applies just to a task order and not to the underlying contract.
[8] Data mining applies a search process to a data set, analyzing for
trends, relationships, and associations. For instance, it can be used
to efficiently query transaction data for characteristics that may
indicate potentially improper activity.
[9] Forensic auditing refers to techniques used to apply increased
scrutiny to the facts and circumstances (including judgments made and
actions taken by individuals party to the transaction) surrounding
potentially fraudulent, improper, and abusive transactions.
[10] Questionable payments include payments for costs that we
determined to be potentially unallowable or lack the support necessary
to determine whether they are allowable under applicable laws,
regulations, and the terms and conditions of the contract. Questionable
payments also include payments for which we had concerns that risks in
CMS's contracting practices resulted in potential waste.
[11] Subch. IV of ch. 4 of title 41, United States Code.
[12] 48 C.F.R. ch. 99. These standards are mandatory for use by all
executive agencies and by contractors and subcontractors in estimating,
accumulating, and reporting costs in connection with pricing and
administration of, and settlement of disputes concerning, all
negotiated prime contract and subcontract procurements with the U.S.
government in excess of $500,000. Certain contracts or subcontracts are
exempt from CAS, such as those that are fixed price or those with a
small business. Additionally, contractors that received less than $50
million in net awards in the prior accounting period are subject to
only certain CAS standards, known as modified coverage.
[13] 48 C.F.R. ch. 3.
[14] 48 C.F.R. 352.216-72(b)(3).
[15] 48 C.F.R. 2.101.
[16] 48 C.F.R. 2.101, 30.202-7, 42.003, 42.101(a)(2), and 9903.202-6.
[17] 48 C.F.R. 2.101. An indirect cost rate is the percentage or dollar
factor that is used to allocate costs not directly identified with a
single final cost objective, such as a contract. Employee fringe
benefits, general and administrative costs, and overhead are examples
of indirect cost rates.
[18] One contract included in our review of payments to contractors was
a Medicare claims administration contract. For this contract, we
focused only on the portion of the contract funded by MMA, which
related to provider customer service activities that were required by
MMA.
[19] Because this amount only represented 2.5 percent of the total MMA
appropriation, we did not include this $25 million in our review.
[20] The $67 million that was not expended as of December 2006
primarily represents amounts obligated to contracts, but not yet paid.
[21] Fiscal intermediaries administer Medicare claims paid to hospitals
and other institutions, such as home health agencies.
[22] Carriers administer the majority of Medicare claims for the
services of physicians and other healthcare providers.
[23] In December 2004, we reported on the information being provided to
beneficiaries through the Medicare help line on eligibility,
enrollment, and benefits. See GAO, Medicare: Accuracy of Responses from
the 1-800-MEDICARE Help Line Should be Improved, GAO-05-130
(Washington, D.C.: Dec. 8, 2004).
[24] In May 2006, we reported on the quality of CMS's communications on
the Part D benefit, including communication through the 1-800-MEDICARE
help line. See GAO, Medicare: Communications to Beneficiaries on the
Prescription Drug Benefit Could be Improved, GAO-06-654 (Washington,
D.C.: May 3, 2006).
[25] 48 C.F.R. 42.703-1 and 42.704(a).
[26] 48 C.F.R. 2.101, 30.202-7, 42.003, 42.101(a)(2), and 9903.202-6.
[27] 48 C.F.R. 9903.201-7.
[28] These eight contractors were IFMC; Ketchum, Inc.; Maximus;
Pearson; Palmetto; TrailBlazer Health Enterprises, LLC (TrailBlazer);
ViPS; and Z-Tech. CMS became the cognizant federal agency for Maximus
in 2005 and Pearson in 2006.
[29] This total dollar amount reflects only the value of the contracts
included in our review. The total contract value for which CMS is the
cognizant federal agency is substantially higher and would include
other contracts at CMS not included in our review as well as contracts
at other agencies.
[30] 48 C.F.R. 9903.201-7 (b).
[31] The seven contractors subject to CAS were IFMC; Ketchum; Maximus;
Pearson; Palmetto; TrailBlazer, and ViPS. According to IFMC, Ketchum,
and TrailBlazer, they were subject to modified CAS.
[32] In addition to these allocated resources, OAGM management told us
that it can obtain additional funds from CMS program offices to fund
specific audits. For fiscal years 2005 through 2007, program offices
provided about $2.3 million, of which $1.1 million was related to
contracting reform activities in fiscal year 2007. CMS also obtained
about $735,000 for fiscal years 2006 and 2007 from the HHS Office of
Inspector General for audits that may impact more than one HHS agency.
[33] Contract management at the Departments of Defense and Energy and
the National Aeronautics and Space Administration is on GAO's high-risk
list, which identifies areas in the federal government with greater
vulnerability to fraud, waste, abuse, and mismanagement. See GAO, High-
Risk Series: An Update, GAO-07-310 (Washington, D.C.: January 2007) and
GAO, Federal Acquisition and Contracting: Systemic Challenges Need
Attention, GAO-07-1098T (Washington, D.C.: July 17, 2007).
[34] 48 C.F.R. Part 6.
[35] 48 C.F.R. Subpart 15.4.
[36] 48 C.F.R. Part 6.
[37] SBA's 8(a) program is a program for developing small businesses
owned by socially and economically disadvantaged individuals.
Contracting officers can award contracts below certain dollar
thresholds to 8(a) firms without competition.
[38] 48 C.F.R. 6.302-2(c).
[39] 48 C.F.R. 16.505(b)(2)(iii).
[40] 48 C.F.R. 16.301-3(a)(2).
[41] 48 C.F.R. 16.104(h) and 16.301-3(a)(1).
[42] Based on Pearson's invoices, Pearson did not apply indirect costs
to the Palmetto services included in its invoices.
[43] Acquisition Policy - 16 Subject: Invoice Payment Procedures,
August 2005.
[44] Under the Prompt Payment Act and its implementing regulations, an
agency's payment due date for paying an invoice without incurring an
interest penalty is generally 30 days after the agency's receipt of a
proper invoice (5 C.F.R. §1315.4(f), (g)).
[45] 48 C.F.R. 16.
[46] 48 C.F.R. 4.804.
[47] 48 C.F.R. 4.804-1(2), (3), and (4).
[48] 48 C.F.R. 12.207 (2006).
[49] 48 C.F.R. 2.101.
[50] 48 C.F.R. 4.703.
[51] 48 C.F.R. 16.104(h) and 16.301-3(a)(1).
[52] According to Palmetto's Chief Financial Officer, in June 2005
Palmetto changed its accounting structure in response to MMA (meaning
the requirement for Medicare claims administration contractors to
adhere to FAR requirements) and the need to be CAS compliant.
[53] This $34.5 million of questionable payments related to unsupported
indirect costs does not include amounts related to overhead that were
questioned as costs not compliant with the terms of the contract.
[54] 48 C.F.R. 42.705-1(b).
[55] This $4.8 million of questionable payments related to unsupported
costs does not include amounts related to indirect costs that were
questioned as costs not compliant with the terms of the contract.
[56] TrailBlazer, a Medicare contractor that administers claims on
behalf of CMS, received a portion of the MMA funds to assist with
provider customer service as required by MMA. Medicare contractors,
including TrailBlazer, receive advance funding based on budgeted
amounts. Three months after the end of a fiscal year, a cost report is
submitted to CMS that summarizes actual costs and serves as the basis
for final determination of allowable costs.
[57] 48 C.F.R. 52.232-7.
[58] The FAR was revised in February 2007 to allow contractors, in
certain circumstances such as when the contract was fully competed or
was for commercial services, to bill subcontractor labor hours at the
contractor's own labor rates. See GAO, Defense Contracting: Improved
Insight and Controls Needed over DOD's Time-and-Materials Contracts,
GAO-07-273 (Washington, D.C.: June 29, 2007), pp. 34-36.
[59] Palmetto billed CMS a total of $3.6 million in additional indirect
costs ($3.3 million) and fees ($318,000) associated with its
subcontract with Pearson. The amount related to indirect costs is
included in questionable payments for cost not compliant with contract
terms ($16.2 million) and unsupported contractor costs billed by
Palmetto ($50.8 million).
[60] 48 C.F.R. 352.216-72(b)(3).
[61] For the purposes of this report, the term "contract" is generally
used to refer to both contracts and task orders issued under contracts.
We use the term "task order" when we discuss an issue or a requirement
that applies just to a task order and not to the underlying contract.
[62] GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
[63] Additionally, if a base contract had multiple task orders--some
task orders meeting the $1.5 million threshold and others not meeting
the threshold--we selected all task orders.
[End of section]
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