Debt Management
Treasury's Cash Management Challenges and Timing of Payments to Medicare Private Plans Gao ID: GAO-09-118 January 30, 2009A timing difference between cash in- and outflows poses challenges for the Department of the Treasury. Increased volatility of monthly cash flows may lead to unexpected short-term debt issuance and hence increased borrowing. While Social Security payments made at the start of the month will diminish gradually in coming years, start-of month payments to Medicare plan sponsors for Medicare Advantage and Part D benefits are projected to grow. As requested, this report (1) describes how Treasury, the Centers for Medicare & Medicaid Services (CMS), and plan sponsors operate under the current payment schedule; (2) identifies timing options; and (3) describes potential implications for Treasury, CMS, and Medicare. GAO analyzed Treasury cash flows, and interviewed Treasury, CMS officials, and plan sponsor representatives.
Treasury's primary debt management goal is to finance the government's borrowing needs at the lowest cost over time. Issuing debt through regularly scheduled auctions lowers borrowing costs because investors and dealers are willing to pay a premium for liquidity and certainty of supply. In 2006 GAO reported that Treasury faced misalignment of cash flows, with large payments due at the start of the month and large cash receipts occurring midmonth. This misalignment results in increasing cash flow volatility. The volatility leads Treasury to carry higher average cash balances and issue short-term debt outside its regular schedule, which may raise overall interest costs. Payments to Medicare plan sponsors made at the start of the month have increased the misalignment of cash flows. These payments have more than doubled between 2005 and 2007, and they are projected to continue to grow. GAO developed several options for changing the timing of Medicare plan payments that would facilitate cash management, keep payments predictable, and treat all plans equally. The options include keeping a single payment but making it on a different date or making multiple payments each month. Treasury officials said that moving some or all of the Medicare payments away from the start of the month would greatly facilitate cash management. CMS expressed concerns about potentially increased administrative burden. Plan sponsors GAO interviewed and CMS's Office of the Actuary indicated that sponsors would generally seek to recoup any loss by raising their Medicare bids, thereby raising costs to the Medicare program and beneficiaries. The overall impact on the federal budget of changing payment timing would depend on the relative size of interest cost reductions and plans' responses.
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Director: Team: Phone:GAO-09-118, Debt Management: Treasury's Cash Management Challenges and Timing of Payments to Medicare Private Plans
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
January 2009:
Debt Management:
Treasury's Cash Management Challenges and Timing of Payments to
Medicare Private Plans:
GAO-09-118:
GAO Highlights:
Highlights of GAO-09-118, a report to congressional requesters.
Why GAO Did This Study:
A timing difference between cash in- and outflows poses challenges for
the Department of the Treasury. Increased volatility of monthly cash
flows may lead to unexpected short-term debt issuance and hence
increased borrowing. While Social Security payments made at the start
of the month will diminish gradually in coming years, start-of-month
payments to Medicare plan sponsors for Medicare Advantage and Part D
benefits are projected to grow. As requested, this report (1) describes
how Treasury, the Centers for Medicare & Medicaid Services (CMS), and
plan sponsors operate under the current payment schedule; (2)
identifies timing options; and (3) describes potential implications for
Treasury, CMS, and Medicare. GAO analyzed Treasury cash flows, and
interviewed Treasury, CMS officials, and plan sponsor representatives.
What GAO Found:
Treasury‘s primary debt management goal is to finance the government‘s
borrowing needs at the lowest cost over time. Issuing debt through
regularly scheduled auctions lowers borrowing costs because investors
and dealers are willing to pay a premium for liquidity and certainty of
supply. In 2006 GAO reported that Treasury faced misalignment of cash
flows, with large payments due at the start of the month and large cash
receipts occurring midmonth. This misalignment results in increasing
cash flow volatility. The volatility leads Treasury to carry higher
average cash balances and issue short-term debt outside its regular
schedule, which may raise overall interest costs.
Payments to Medicare plan sponsors made at the start of the month have
increased the misalignment of cash flows. These payments have more than
doubled between 2005 and 2007, and they are projected to continue to
grow. GAO developed several options for changing the timing of Medicare
plan payments that would facilitate cash management, keep payments
predictable, and treat all plans equally. The options include keeping a
single payment but making it on a different date or making multiple
payments each month.
Treasury officials said that moving some or all of the Medicare
payments away from the start of the month would greatly facilitate cash
management. CMS expressed concerns about potentially increased
administrative burden. Plan sponsors GAO interviewed and CMS‘s Office
of the Actuary indicated that sponsors would generally seek to recoup
any loss by raising their Medicare bids, thereby raising costs to the
Medicare program and beneficiaries. The overall impact on the federal
budget of changing payment timing would depend on the relative size of
interest cost reductions and plans‘ responses.
Figure: Average Large Start-of-Month Payments Made by Treasury (CY
2007) (Dollars in billions):
[Refer to PDF for image]
Social Security:
Average monthly payment: $21.52 billion.
Medicare Plans:
Average monthly payment: $10.024 billion.
Civil Service Retirement:
Average monthly payment: $4.052 billion.
Military Active Duty:
Average monthly payment: $3.317 billion.
Military Retirement:
Average monthly payment: $3.277 billion.
Veterans Benefits:
Average monthly payment: $2.503 billion.
Source: GAO analysis of Treasury data.
[End of figure]
What GAO Recommends:
Congress should consider the impacts of payment timing on Treasury‘s
cash management challenges when enacting legislation that specifies
payment timing. GAO also recommends that the Treasury and CMS jointly
study options to improve Treasury‘s ability to manage cash flow and
reduce interest costs while not unduly increasing CMS‘s administrative
burden. Based on the work done and our discussions with Treasury
officials, we believe it is reasonable for this study to be completed
by the end of CY 2009. Both Treasury and CMS agreed with GAO‘s
recommendation.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-118]. For more
information, contact Susan J. Irving at irvings@gao.gov or James C.
Cosgrove at cosgrovej@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Current Timing of Payments to Medicare Plan Sponsors Poses Challenges
for Treasury's Cash Management, Appears Manageable for CMS, And
Financially Favorable for Plan Sponsors:
Alternative Payment Options Could Help Address Treasury's Cash
Management Challenges:
Changing Payment Timing Involves Balancing Treasury's Cash Management
Challenges, Administrative Impact on CMS, and Potential Impacts on
Medicare:
Conclusions:
Matter for Congressional Consideration:
Recommendation for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Estimating the Effect of Medicare Payment Realignments on
Treasury's Interest Costs:
The Analysis Used Monthly Data on Cash Balances, Deposits, Withdrawals,
and Other Variables Compiled from Daily Treasury Statements:
Greater Volatility Leads to Higher Treasury Cash Balances:
Interest Cost Reductions from Medicare Payment Realignments:
Limitations of Our Analysis:
Appendix II: CMS's Estimates of the Impact of Alternative Payment
Timing Options on Federal Medicare Payments to Plan Sponsors:
Appendix III: Comments from the Department of the Treasury:
Appendix IV: Comments from the Department of Health and Human Services:
Tables:
Table 1: Estimated Effects on Treasury's Cash Balances and Interest
Costs of Changing Payment Timing under GAO's Options Rounded to the
Nearest $10 Million:
Table 2: Regressions Explaining Treasury's Average Monthly Cash
Balance:
Table 3: Estimated Reduction in Volatility, Cash Balance, and Interest
Cost:
Table 4: OACT Upper Bound Estimates of the Impact of Alternative
Payment Timing Options on Federal Medicare Payments to Plan Sponsors:
Figures:
Figure 1: Average Large Start-of-Month Payments Made by Treasury (CY
2007):
Figure 2: Smoothing the Payment of Social Security Benefits:
Figure 3: Net Treasury Deposits and Withdrawals for Fiscal Year 2007:
Figure 4: Treasury Total Operating Cash Balance in Fiscal Years 2005
and 2007:
Abbreviations:
AHIP: America's Health Insurance Plans:
CBO: Congressional Budget Office:
CM: Cash management:
CMS: Centers for Medicare & Medicaid Services:
CPC: Center for Drug and Health Plan Choice:
FEHBP: Federal Employees Health Benefits Program:
FFS: Fee-for-service:
HMO: Health maintenance organization:
MA: Medicare Advantage:
MA-PD: Medicare Advantage prescription drug plan:
MIPPA: Medicare Improvements for Patients and Providers Act:
OACT: Office of the Actuary:
OFM: Office of Financial Management:
OIS: Office of Information Services:
PDP: Prescription drug plan:
PFFS: Private fee-for-service:
PPO: Preferred provider organization:
TGA: Treasury General Account:
TIO: Term Investment Option:
TT&L: Treasury Tax and Loan:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
January 30, 2009:
The Honorable Charles B. Rangel:
Chairman:
Committee on Ways and Means:
House of Representatives:
The Honorable Pete Stark:
Chairman:
Subcommittee on Health:
Committee on Ways and Means:
House of Representatives:
Congress has delegated to the Department of the Treasury the power to
borrow the money needed to operate the federal government and make
borrowing decisions subject to a statutory limit. Treasury's primary
debt management goal is to finance the government's borrowing needs at
the lowest cost over time. To meet this objective Treasury issues debt
through auctions in a "regular and predictable" pattern of dates and in
amounts across a range of benchmark securities. According to Treasury,
because investors and dealers rely upon the certainty of supply of
Treasury securities, they tend to pay a slight premium, which lowers
Treasury's borrowing costs. Overall, investors are willing to reward
Treasury with lower borrowing costs in return for the benefits of
liquidity and certainty of supply.
In our work on federal cash management, we reported that a timing
difference between large start-of-month payments and midmonth cash
inflows from taxes poses challenges for the Department of the Treasury.
[Footnote 1] Because Treasury seeks to issue debt in a "regular and
predictable pattern," regular bill issuances cannot be moved or
suddenly increased by the amount needed to make the large payments that
must be made at the beginning of the month. To make payments, Treasury
must raise cash through borrowing, including using short-term
securities (cash management (CM) bills) issued outside Treasury's
regular borrowing cycle that require Treasury to pay investors a higher
rate. Treasury's cash needs throughout the year reflect government
revenues and outlays. Generally Treasury's borrowing cycles are
determined by projections of these cash needs. Maintaining sufficient
cash balances allows the Treasury to absorb unexpected low points in
receipts or spikes in outlays while limiting issuance of CM bills, but
maintaining these balances carries costs for taxpayers. The higher
volatility of Treasury's cash flows increases the size of these
precautionary cash balances and hence Treasury's overall interest
costs.[Footnote 2]
You asked us to examine the effects of start-of-month payments to
Medicare plan sponsors on Treasury cash management and to develop
options for better aligning cash flows. Generally, Medicare
beneficiaries have the option of obtaining medical or drug coverage
from private health plans sponsored by organizations--typically
insurance companies--under contract with the Centers for Medicare &
Medicaid Services (CMS), the agency that administers the Medicare
program.[Footnote 3] The Medicare Advantage (MA) program offers an
alternative to the original Medicare fee-for-service (FFS) program.
[Footnote 4] The Medicare Part D program begun in 2006 offers an
outpatient prescription drug benefit.[Footnote 5] Part D eligible
beneficiaries may enroll in stand-alone prescription drug plans (PDP),
MA plans, or MA plans that offer prescription drug coverage (MA-PD).
[Footnote 6] Instead of paying providers' claims directly, the federal
government pays plan sponsors to provide their enrollees' Medicare
benefits. Of the 44 million Medicare beneficiaries, 25 million were
enrolled in a Medicare private plan as of January 2008. In 2007,
Treasury's payments to plan sponsors averaged $10 billion per month.
Any change in payment timing would affect Treasury, CMS, and the plan
sponsors that provide benefits under the MA and prescription drug
programs. This report (1) describes how Treasury, CMS, and Medicare
plan sponsors operate under the current payment schedule; (2)
identifies alternative payment approaches designed to address
Treasury's cash management challenges; and (3) describes potential
implications of alternative payment timing options for Treasury, CMS,
and Medicare, including plan sponsors and beneficiaries.
To address these issues we interviewed Treasury, CMS, and other federal
and state agency officials involved with making payments to private
health plan sponsors. We interviewed Treasury officials regarding
principles and practice of cash and debt management and reviewed
relevant literature on this subject. Our analysis of Treasury data
predates the turmoil in financial markets in September 2008. In
addition, we reviewed statutes, regulations, and agency policy
documents governing Medicare payments to plan sponsors. We also spoke
with representatives of five Medicare plan sponsors that offer either
MA or prescription drug benefits, or both. Although these sponsors were
selected to reflect the variety of plans receiving start-of-month
payments because we used a selective sample, our reported results
cannot be generalized to all plan sponsors.[Footnote 7]
We developed five alternative payment timing options that met our
criteria of making cash management easier and less costly for Treasury,
treating all plan sponsors equally, and offering a predictable schedule
of payments. Using Treasury data, we developed an illustrative estimate
of the potential reduction in interest costs under each option and
projected these reductions over the next 10 years (see appendix I). We
consulted with finance experts at the Congressional Budget Office (CBO)
and at the Department of Treasury concerning the assumptions we used
for these estimates. As discussed in this report, there are potential
offsets to reductions in interest costs (see appendix II). We obtained
information on them but did not estimate the net impact of changing
payment timing.
To assess the reliability of data used in this study, we examined the
data to look for outliers and anomalies and addressed such issues as
appropriate. Where possible and appropriate, we corroborated the
results of our data analysis with other sources. On the basis of our
assessment we believe the data are reliable for the purposes of this
review.
We conducted this work from February 2008 through October 2008 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.
Results in Brief:
The current timing of payments to Medicare plan sponsors poses
challenges to Treasury's cash management; appears manageable but
complex and time-consuming for CMS; and may provide income to Medicare
plan sponsors. In recent years, increased cash flow volatility and
continued misalignment of the government's cash inflows and outflows
have contributed to Treasury's cash management challenges. Part of the
challenge is related to the growth in payments made at the start of the
month to Medicare plan sponsors for MA and Part D benefits. Between
2005 and 2007, average monthly Medicare plan payments more than doubled
due to growth in MA outlays and the inception of the Part D benefit in
January 2006. Payments to Medicare plan sponsors are the second largest
category of Treasury's start-of-month payments. The largest category is
payments to Social Security recipients, but an administrative change in
that schedule means that those start-of-month payments will diminish
over time. In contrast, payments to Medicare plan sponsors are
projected to grow.
To make the Medicare plan payments, CMS calculates millions of
individual payments and certifies several hundred payments each month.
While monthly amounts remain relatively stable during a contract
calendar year, CMS must nonetheless recalculate and recertify each
month to take into account the new information received from plan
sponsors on enrollments and disenrollments. CMS's process for making
the monthly payments involves staff in several organizational units and
takes about 2 weeks.
Plan sponsors use MA and Part D payments to pay health care providers-
-subject to prompt payment rules--and to meet administrative expenses.
Because Medicare plan sponsors are at risk for the cost of providing
covered benefits to their enrollees, payments may exceed, equal, or
fall short of the actual cost of providing care. If start-of-month
payments are received faster than funds are spent, sponsors may
accumulate surpluses, which they told us they generally place in low-
interest, short-term investments until the money is needed. Sponsor
representatives expressed differing views on the extent to which such
cash was available for investment and on the importance of any
resulting income to their business model. Some sponsors indicated that
the income from these investments was an important revenue source;
other sponsors said it was not.
We developed several options for changing payment timing, all of which
would facilitate Treasury's cash management, keep payments predictable,
and continue the current practice of treating all plans equally. The
options included keeping a single payment but making it on a different
date or making multiple payments each month. Our illustrative estimates
of potential interest cost reductions under the options ranged from $40
million to $90 million per year depending on the assumptions used.
Treasury officials told us that any change in payment timing that moved
some or all of the Medicare payments to a different time of the month
would greatly facilitate cash management. They said that better
aligning the payments with either mid-month cash inflows from tax
deposits or with their regularly scheduled debt issuances on Thursdays
would facilitate their management of the government's cash flows. CMS
officials expressed concerns about any change in payment timing that
would add to an already complex and labor-intensive process. CMS
officials indicated that maintaining its practice of preparing Medicare
plan payments once per month would have the least effect on its
operations.
All of the plan sponsor representatives we interviewed expressed
concerns about changes to payment timing. Sponsors generally indicated
that they would seek to recoup any loss in short-term investment income
by increasing their Medicare bids. This in turn would increase Medicare
spending. It would also increase beneficiary premiums or cost sharing,
or reduce benefits, or some combination of these. Thus, alternative
payment timing options could raise costs to the Medicare program and
beneficiaries, depending upon the magnitude of plan sponsors'
responses.
Staff at the CMS Office of the Actuary (OACT) said they would expect
plan sponsors to respond to a change in payment timing by altering
their Medicare bids. The direction and magnitude of any change in bids
would depend on which payment timing option was selected. In addition,
OACT indicated that the change in bids would likely vary by the size of
plan, with smaller plan sponsors seeking to more fully recover any lost
investment income. OACT also noted that competition among plans--
particularly stand-alone Part D plans--means that some sponsors might
be unwilling to raise their bid if doing so risks losing market share.
OACT estimated the upper bounds for changes in federal Medicare
payments under the various payment timing options, assuming that all
plan sponsors reflected all of their revenue changes in their bids.
OACT estimates ranged from a $20 million per year reduction to a $120
million per year increase in Medicare plan payments. The overall impact
on the federal budget of a change in payment timing would depend on the
relative size of interest cost reductions and plans' responses.
Even assuming, however, that sponsors increase their Medicare bids
sufficient to entirely offset any reductions in interest costs that
accrue to the federal government, a case can be made that this would
increase transparency about the costs of Medicare programs.
Accordingly, we believe that while the potential for higher Medicare
spending should be considered, it should not be the sole or determining
factor of whether the current timing of payments to Medicare plan
sponsors should be changed.
Congress should consider Treasury's cash management challenges when
enacting legislation that specifies payment timing; if payment timing
is not specified, Congress should direct implementing agencies to
consider Treasury's cash management challenges in establishing payment
schedules. We also recommend that the Secretary of the Treasury and the
Administrator of CMS convene a joint effort to study options to improve
Treasury's ability to manage cash flow and reduce interest costs while
not unduly increasing administrative burden for CMS. Based on the work
done and our discussions with Treasury officials, we believe it is
reasonable for this study to be completed by the end of calendar year
(CY) 2009. Both Treasury and CMS agreed with GAO's recommendation.
Background:
Treasury's Cash Management Challenges:
In our earlier reviews we reported that Treasury faces challenges due
to a misalignment in the timing of cash flows. Cash outflows for
payments in several large programs are made at the start of the month-
-a time when Treasury does not generally have sufficient inflows to
make the payments. These start-of-month payments represent a large
share of Treasury's total cash outflows. About one-quarter of the
government's annual fiscal cash outlays (withdrawals excluding debt
redemption) have taken place in the first 3 days[Footnote 8] of each
month since fiscal year 2005. Payments for Social Security benefits are
the largest single type of start-of-month payment,[Footnote 9] and the
second largest is for Medicare benefits. (See figure 2.) Payments are
also made at the start of the month for civilian and military retiree
benefits, military personnel, and veterans benefits. Large cash
inflows, however, generally occur at other times of the month, that is,
midmonth from tax receipts and on Thursdays from the issuance of
regularly scheduled Treasury securities.
Figure 1: Average Large Start-of-Month Payments Made by Treasury (CY
2007):
[Refer to PDF for image]
Social Security:
Average monthly payment: $21.52 billion.
Medicare Plans:
Average monthly payment: $10.024 billion.
Civil Service Retirement:
Average monthly payment: $4.052 billion.
Military Active Duty:
Average monthly payment: $3.317 billion.
Military Retirement:
Average monthly payment: $3.277 billion.
Veterans Benefits:
Average monthly payment: $2.503 billion.
Source: GAO analysis of Treasury data.
[End of figure]
This lack of alignment between the timing of large cash inflows and
outflows means that Treasury may need to borrow to make payments, and
this borrowing may raise overall interest costs. Our prior work showed
that Treasury had come to rely on cash management (CM) bills when
Treasury's operating cash balance was low. CM bills are short-term
securities issued outside of Treasury's regular borrowing schedule.
They provide Treasury the flexibility to raise cash needed to make
start-of-the-month payments, but Treasury has paid a premium for doing
so in part because of their irregularity and short-term nature.
[Footnote 10]
Our previous work explored two possible alternatives to this borrowing:
(1) Treasury could accumulate and maintain higher cash balances and (2)
Treasury should explore ways to address the misalignment of cash flows.
Each of these alternatives is discussed below.
Higher cash balances are generally costly and raise issues for monetary
policy. We found that one alternative--accumulating and maintaining
higher cash balances in order to make payments--presented problems both
in terms of cost and in terms of the implications for the conduct of
monetary policy. Maintaining higher cash balances is likely to be
costly because Treasury generally faces a negative funding spread. That
is, the interest earned on cash balances is generally insufficient to
cover the cost of the increased borrowing needed to maintain these
balances.
In addition, Treasury has faced capacity constraints in making short-
term investments of excess cash.[Footnote 11] Our 2007 review found
that Treasury's ability to invest its excess cash balances above its
target balance faced capacity constraints and concentration risk. Under
the law in effect in 2007, Treasury was only permitted to invest its
excess cash balances in depository institutions and in obligations of
the U.S. government. Treasury's two permanent vehicles--Treasury Tax
and Loan (TT&L) notes and the Term Investment Option (TIO) offerings--
subject Treasury to high concentration risk and have limited capacity.
By capacity concerns, we mean that Treasury's ability to invest all
available cash may be hindered because of decreases in the number of
participants or insufficient collateral available for depository
institutions to secure Treasury's investments on days when Treasury has
high cash balances. According to Treasury, at times it has been unable
to place all of its cash in part because of a reduction in the number
of participants in its investment programs.[Footnote 12]
Moreover, Treasury's balances can affect the conduct of monetary
policy. Treasury can make short-term investments of excess cash: that
is, cash not needed to make payments or to meet its target balance in
its General Account (TGA).[Footnote 13] If Treasury's TGA balance
exceeds or falls short of its target, the Federal Reserve must
neutralize the change in overall reserves through market interventions.
If Treasury has greater amounts of short-term cash than can be invested
through other investment programs, the cash would have to be deposited
into the TGA. If the TGA exceeded its target, the Federal Reserve would
have to inject large amounts of reserves into the market. On the other
hand, insufficient funds in the Treasury's total operating cash balance
could cause the TGA to fall below its target, and the Federal Reserve
would have to take reserves out of the system.[Footnote 14]
Treasury's decisions about how much cash to hold are also affected by
the fact that it must maintain a target balance in the TGA large enough
to avoid an overdraft. Treasury generally targets a $5 billion balance
in the TGA. An overdraft of the TGA could occur if the anticipated
receipts for the day fall short of expectation or if there are
unanticipated disbursements. Treasury cannot risk an overdraft in its
TGA account because the Federal Reserve is not authorized to lend
directly to Treasury, in part to preserve the Federal Reserve's
independence as the nation's central bank. Although an account balance
greater than $5 billion would provide Treasury with increased overdraft
protection, it could also increase borrowing, which would be costly
whenever Treasury faces a negative funding spread.
Treasury does not have authority to control the timing of all cash
flows. Our prior work also recommended that Treasury explore additional
opportunities for closer alignment of cash flows. Treasury, however, is
a passive agent; it collects and disburses federal funds at agencies'
request. It does not determine when major benefit payments are made or
when tax payments are due. For example, the payment dates of civil
service and railroad retirement are set by law. Due dates for tax
payments are also set by federal statute.
A precedent for changing the timing of Treasury payments was set when
the Social Security Administration adjusted the date each month that
benefits are paid to new Social Security recipients. These actions will
help smooth the payment of Social Security benefits--the largest
federal benefit payment. Prior to June 1997, regular monthly Social
Security benefits were paid on (or around) the 3RD of each month. In
1997, the payment date was changed for beneficiaries filing after May
1997. These new beneficiaries are paid on the 2ND, 3RD, or 4TH
Wednesday of the month depending on their date of birth. Social
Security benefits paid at the start of the month are anticipated to
remain relatively steady for a number of years and then decline.
Because beneficiaries receiving their benefits before 1997 continue to
receive benefits at the start of the month, our prior work estimated
that the large payments for Social Security benefits could last another
10 years. (See figure 2.)
Figure 2: Smoothing the Payment of Social Security Benefits:
[Refer to PDF for image]
This figure is an illustration of the following information:
Smoothing the Payment of Social Security Benefits:
SSA‘s decision to change the timing of Social Security payments was one
of the proposals made by federal agencies in response to the National
Performance Review, an Administration reinvention initiative. SSA
sought to improve its customer service and smooth workload peaks
associated with paying all benefits on the same day. SSA wanted to
reach its goal of minimal wait times for service to customers, e.g.,
with questions about their Social Security check. SSA believed that
service was deteriorating and would deteriorate further as the baby
boom generation retired while SSA‘s resources were reduced. SSA also
believed that changing payment timing would benefit the business and
banking communities, helping them to better utilize their resources
throughout the month that were used to process Social Security payments
and to reduce operational risk to these communities due to the large
payment file processed to pay benefits.
Under the Social Security Act, the SSA Commissioner was given
discretion over the timing of payments. Prior to making the change,
SSA‘s change was published in the Federal Register for public comment.
SSA also held 10 focus groups at 5 locations around the country and
conducted meetings with stakeholders including representatives from the
business community, financial community, other government agencies
including the Department of Treasury, the Federal Reserve, the U.S.
Postal Service, and advocacy groups. SSA stated that the overwhelming
consensus of the meetings was support for payment timing change.
SSA considered changing payment timing for current beneficiaries but
rejected this for two reasons. First, changing the payment date would
disrupt monthly payment arrangements for current beneficiaries. Second,
SSA did not have legislative authority to make a one-time additional
payment to current beneficiaries that would cover the period from the
old to new payment date.
SSA exempted certain individuals from the payment timing change because
they had low incomes: (1) Social Security beneficiaries where the
family received income from Supplemental Security Income and (2)
beneficiaries whose Medicare premium was paid by the state in which
they lived. SSA stated that exemption of this second group had been
requested by the Health Care Financing Administration, the federal
agency that administered the Medicare program.
Source: Federal Register, Vol. 62, No. 28, February 11, 1997, p, 6114.
Note: The Health Care Financing Administration is now CMS.
[End of figure]
Payments to Medicare Plan Sponsors:
In 2007, approximately 288 plan sponsors contracted with CMS to provide
benefits under the MA program, the Part D program, or both.[Footnote
15] Plan sponsors received approximately $121 billion in Medicare
payments from Treasury--about $78 billion for the MA program and about
$43 billion for the Part D program that year[Footnote 16]. These
payments were concentrated in a small number of plan sponsors; 6
sponsors received about half of all Medicare plan payments. Payments to
sponsors are fairly stable from month to month because, generally,
beneficiaries may decide on a new plan before the start of each year
and have limited opportunities to change their selection.
Plans in the MA program provide Medicare-covered services and may
provide additional benefits relative to those available under
traditional Medicare FFS.[Footnote 17] For each MA enrollee, Medicare
pays plan sponsors a fixed amount monthly that is based on a bid and a
benchmark. MA sponsors submit bids to CMS that reflect their projected
revenue requirements for the medical expenses, nonmedical expenses, and
profit margin associated with supplying the benefit package available
in the Medicare FFS program. If the sponsor's bid is higher than the
administratively set rates, known as benchmarks, Medicare pays the
sponsor the amount of the benchmark, and the sponsor must charge
beneficiaries a premium to collect the amount by which the bid exceeds
the benchmark. If the sponsor's bid is lower than the benchmark, the
sponsor receives the amount of the bid plus additional payments, known
as rebates, equal to 75 percent of the difference between the benchmark
and the bid. MA sponsors are required to spend their rebates on
additional benefits, reduced cost sharing, reduced premiums, or a
combination of the three.
Plan sponsors in the Part D program provide outpatient prescription
drug coverage to Medicare FFS beneficiaries who enroll in stand-alone
prescription drug plans (PDP) and to MA beneficiaries through their MA
plans (MA-PD).[Footnote 18] Medicare makes a per capita monthly
prospective payment to sponsors based on estimates that sponsors
provide in their approved bids prior to the beginning of the plan year.
These payments consist of three subsidies: (1) the direct subsidy,
which, together with beneficiary premiums, is designed to cover the
sponsor's cost of providing the benefit; (2) the reinsurance subsidy,
which covers drug costs for beneficiaries who have reached catastrophic
coverage;[Footnote 19] and (3) the low-income subsidy, which covers
premiums and copayments for certain low-income beneficiaries. The
following year, CMS reconciles these prospective payments with
sponsors' actual costs to determine whether sponsors owe money to
Medicare or Medicare owes money to sponsors. In addition, CMS must
determine whether risk-sharing payments are required to account for
sponsors' unexpected profits and losses.
Medicare payments for MA and Part D are paid on the first day of each
month that is not a weekend or holiday.[Footnote 20] MA plan sponsors
that also provide a Part D benefit receive combined payments that
reflect amounts for each program. Part C of the Social Security Act
requires that the Secretary make monthly payments to plan sponsors in
advance of the coverage provided under MA, while the statute
establishing Part D gives the Secretary of HHS more discretion on
payment timing for benefits provided under Part D.[Footnote 21] Thus,
HHS is not precluded by the Social Security Act from paying MA-PD plans
or PDP plans for Part D coverage on a time frame different than MA
plans are paid for Part C benefits.
Plan Sponsors' Payments to Providers:
The MA program offers a variety of plans. The three main types of plans
are health maintenance organizations (HMO), preferred provider
organizations (PPO), and private fee-for-service (PFFS).[Footnote 22]
Generally, each type of plan in the MA program provides services
through different arrangements with contracted providers or by
purchasing services from noncontracted providers. Medicare Advantage
HMOs and PPOs establish networks of physicians, hospitals, and other
providers. Typically, HMOs pay providers on a salary, FFS, or
capitation basis,[Footnote 23] and PPOs may pay providers on a
discounted FFS basis. In contrast, the vast majority of PFFS plans
operate without an established provider network and pay providers on a
FFS basis. MA plan sponsors must pay 95 percent of "clean claims"--
generally those that have no defect or do not lack any required
substantiating documentation--within 30 days of receipt if they are
submitted by an enrollee of a PFFS plan or are claims for services
obtained from out-of-network providers. For clean claims that are not
paid within 30 days, the MA plan sponsor must pay interest. All other
claims must be paid or denied within 60 calendar days from the date of
the request.[Footnote 24]
PDP and MA-PD plan sponsors generally contract with pharmacies to
provide Part D covered drugs to enrollees. Sponsors negotiate with
pharmacies in order to include a sufficient number and geographic
distribution of pharmacies in their networks. Sponsors reimburse the
pharmacy for the cost of the drug, plus a dispensing fee. Beginning
January 1, 2010, plan sponsors must make payment on all clean claims
submitted by pharmacies within 14 days of receipt for claims submitted
electronically and 30 days for claims submitted otherwise. If payment
for a clean claim is not made within that time frame, the plan sponsor
must pay interest to the pharmacy that submitted the claim.[Footnote
25]
Current Timing of Payments to Medicare Plan Sponsors Poses Challenges
for Treasury's Cash Management, Appears Manageable for CMS, And
Financially Favorable for Plan Sponsors:
The current timing of payments to Medicare plan sponsors poses
challenges to Treasury's cash management, appears manageable if complex
and time-consuming for CMS, and may provide income to Medicare plan
sponsors. Between 2005 and 2007 the size of average start-of-month
payments to plan sponsors more than doubled due to higher payments to
MA plan sponsors and the start of the Part D drug benefit in 2006. The
growth in MA payments has widened the misalignment between cash inflows
and outflows and increased Treasury's challenges in managing its cash
position. Over the same period, the volatility of Treasury's cash
balances has also grown, adding to Treasury's cash management
challenges. To make the start-of-month payments to Medicare plan
sponsors, CMS has developed a process involving several CMS
organizational units that allows CMS to calculate, review, and certify
hundreds of payment amounts each month to plan sponsors. Plan sponsors
we spoke with said they use the Medicare plan payments to pay providers
within time frames specified by government regulations. Where payments
are not yet needed to meet plan expenses, plan sponsors told us they
keep cash in conservative, low-interest, short-term investments. Some
sponsors indicated that the income from these investments was an
important revenue source; other sponsors said it was not.
Misalignment of Cash Flows Continues to Present Treasury with Cash
Management Challenges:
The cash management challenges we found in our prior work have
continued for Treasury. The volatility of cash flows has increased, and
large cash inflows and outflows remain misaligned. Because payments to
Medicare plan sponsors for MA and Part D benefits are made at the start
of each month, they increase the misalignment between cash inflows and
outflows and add to Treasury's cash management challenges. While the
start-of-month payments for Social Security will diminish over time,
[Footnote 26] payments to Medicare plan sponsors are expected to grow.
Volatility of Treasury's Cash Flows Continued in Fiscal 2007:
Treasury confirmed that it continues to face cash management challenges
due to the misalignment of cash flows. Treasury data illustrate the
continued misalignment of cash inflows and outflows (deposits and
withdrawals) in fiscal year (FY) 2007. (See figure 3.)
Figure 3: Net Treasury Deposits and Withdrawals for Fiscal Year 2007:
[Refer to PDF for image]
This figure is a multiple line graph depicting the following data:
Net Treasury Deposits and Withdrawals for Fiscal Year 2007:
Date: 10/2;
Deposits: $22.656 billion;
Withdrawals: -$28.104 billion.
Date: 11/2;
Deposits: $6.055 billion;
Withdrawals: -$6.941 billion.
Date: 12/2;
Deposits: $16.502 billion;
Withdrawals: -$57.068 billion.
Date: 1/2;
Deposits: $34.638 billion;
Withdrawals: -$29.903 billion.
Date: 2/2;
Deposits: $9.434 billion;
Withdrawals: -$37.978 billion.
Date: 3/2;
Deposits: $9.638 billion;
Withdrawals: -$42.932 billion.
Date: 4/2;
Deposits: $24.31 billion;
Withdrawals: -$20.434 billion.
Date: 5/2;
Deposits: $15.331 billion;
Withdrawals: -$8.488 billion.
Date: 6/2;
Deposits: $18.968 billion;
Withdrawals: -$59.749 billion.
Date: 7/2;
Deposits: $24.693 billion;
Withdrawals: -$21.41 billion.
Date: 8/2;
Deposits: $7.392 billion;
Withdrawals: -$7.057 billion.
Date: 9/2;
Deposits: $22.233 billion;
Withdrawals: -$18.904 billion.
Date: 9/30;
Deposits: $14.95 billion;
Withdrawals: -$7.628 billion.
Source: GAO analysis of Treasury data.
Note: These data are net of debt transactions (issuances and
redemptions).
[End of figure]
In FY 2007, as we found in our prior work, payments Treasury made on
the first three days[Footnote 27] of the month comprised about one-
fourth of the total cash payments net of debt transactions. As shown in
figure 4, the volatility of Treasury's cash balances increased in FY
2007 relative to FY 2005.[Footnote 28]
Figure 4: Treasury Total Operating Cash Balance in Fiscal Years 2005
and 2007:
[Refer to PDF for image]
This figure is a multiple line graph depicting the following data:
Treasury Total Operating Cash Balance in Fiscal Years 2005 and 2007:
Date: 10/1;
Total Operating Cash Balance, FY 2005: $18.279 billion;
Total Operating Cash Balance, FY 2007: $52.778 billion.
Date: 11/1;
Total Operating Cash Balance, FY 2005: $35.111 billion;
Total Operating Cash Balance, FY 2007: $57.276 billion.
Date: 12/1;
Total Operating Cash Balance, FY 2005: $7.564 billion;
Total Operating Cash Balance, FY 2007: $17.355 billion.
Date: 1/3;
Total Operating Cash Balance, FY 2005: $20.48 billion;
Total Operating Cash Balance, FY 2007: $20.548 billion.
Date: 2/1;
Total Operating Cash Balance, FY 2005: $49.327 billion;
Total Operating Cash Balance, FY 2007: $66.227 billion.
Date: 3/1;
Total Operating Cash Balance, FY 2005: $6.994 billion;
Total Operating Cash Balance, FY 2007: $16.219 billion.
Date: 4/1;
Total Operating Cash Balance, FY 2005: $10.202 billion;
Total Operating Cash Balance, FY 2007: $6.089 billion.
Date: 5/2;
Total Operating Cash Balance, FY 2005: $83.198 billion;
Total Operating Cash Balance, FY 2007: $123.613 billion.
Date: 6/1;
Total Operating Cash Balance, FY 2005: $9.531 billion;
Total Operating Cash Balance, FY 2007: $7.92 billion.
Date: 7/1;
Total Operating Cash Balance, FY 2005: $10.096 billion;
Total Operating Cash Balance, FY 2007: $8.242 billion.
Date: 8/1;
Total Operating Cash Balance, FY 2005: $26.966 billion;
Total Operating Cash Balance, FY 2007: $26.611 billion.
Date: 9/1;
Total Operating Cash Balance, FY 2005: $6.327 billion;
Total Operating Cash Balance, FY 2007: $8.593 billion.
Date: 9/27;
Total Operating Cash Balance, FY 2005: $57.543 billion;
Total Operating Cash Balance, FY 2007: $75.237 billion.
Source: GAO analysis of Treasury data.
[End of figure]
In FY 2008, Treasury's cash management challenges have been heightened
by increases in the federal deficit. At the April 2008 meeting of the
Treasury Borrowing Advisory Committee, Treasury highlighted the flat
growth of individual and corporate income taxes, an increase in outlays
of 6 percent, and the impact of the stimulus program enacted in
February 2008.[Footnote 29] Volatility in receipts and outlays as well
as debt redemptions and sales by the Federal Reserve resulted in less
predictable cash balances, making cash management an ongoing challenge.
According to a senior Treasury official, rapid growth in financing
needs resulted in an increasing dependence on CM bills. In the first
half of FY 2008, Treasury issued over $300 billion in CM bills compared
with $267 billion in all of FY 2007.
Payments to Medicare Plan Sponsors are Part of Treasury's Cash
Management Challenge:
The Medicare payments Treasury must make at the start of the month are
primarily to MA and Part D plan sponsors.[Footnote 30] In CY 2007 these
payments represented about 25 percent of total cash payments made on
the same day.[Footnote 31] These payments have increased in the past 2
years following the inception of the Part D benefit in January 2006 and
increases in MA outlays.[Footnote 32] Total payments to Medicare plan
sponsors made at the start of the month were $46.7 billion in CY 2005,
$105 billion in CY 2006, and $120 billion in CY 2007, for an average
$10 billion per month in CY 2007. A senior Treasury official told us
that the growing Medicare payments at the start of the month pose cash
management challenges.
In contrast to Social Security payments made at the start of the month,
payments to Medicare plan sponsors are projected to continue to grow
over the next 10 years. Estimates prepared in Spring 2008 by both CBO
[Footnote 33] and CMS[Footnote 34] show spending for Medicare MA and
Part D combined growing at an annual rate of about 10 percent from FY
2009 through FY 2017. However, enactment of the Medicare Improvements
for Patients and Providers Act of 2008 (MIPPA)[Footnote 35] in July
2008 is likely to reduce estimated spending growth. In its cost
estimate for MIPPA, CBO noted that the act would decrease MA enrollment
to about 12.0 million individuals in 2013 relative to CBO's previous
baseline estimate of 14.3 million. The estimated effects of MIPPA on MA
spending will be reflected in CBO's January baseline and in next
spring's Medicare Trustees report.
CMS Calculates and Certifies Payment Amounts Monthly to Ensure Plan
Sponsors are Paid at the Start of the Month:
For MA and Part D payments to be made at the start of a month, CMS's
Office of Information Services (OIS), Center for Drug and Health Plan
Choice (CPC,) and Office of Financial Management (OFM) work together to
calculate and certify payment amounts and transmit this information to
Treasury. CMS requires that plan sponsors provide information on
enrollment for the payment period and submit these data by a specific
date each month, usually midmonth. The agency completes the payment
calculation and verification process in approximately 2 weeks.
OIS takes approximately 3 days to calculate MA and Part D payments each
month. OIS computes beneficiary-level payments for each plan using
enrollment and other data. The number of beneficiaries reported for
each plan may vary slightly from month to month, primarily due to
enrollments of newly eligible beneficiaries and disenrollments due to
deaths or beneficiaries moving out of a plan's service area. For
payment purposes, each plan's enrollment is measured as of a cutoff
date, generally in the middle of the month, that is specified at the
beginning of the contract year. Although beneficiaries' coverage
becomes effective the first of the month after they enroll, enrollments
processed after the payment cutoff date are not reflected in that
month's payment but rather in the capitation payment for the subsequent
month. For example, sponsors must submit plan enrollments by the cutoff
date of April 16 to receive a May 1 payment for these individuals. If
the sponsors submit enrollments after the cutoff day in April (i.e.,
enrollments submitted to CMS between April 17 and 30), they will not
receive their May payments for those beneficiaries until June 1.
Next, CPC reviews and validates the calculations for each enrollee and
creates a summary file of plan payments. This validation takes 3 days.
CPC then sends a file to OFM that specifies the amounts that will need
to be disbursed from the various Medicare appropriations accounts for
each payment.[Footnote 36] OFM notifies Treasury of the totals,
certifies the payment amounts, and prepares a formatted file for
Treasury with the payments. OFM then sends this payment file to
Treasury 2 to 3 business days prior to the payment date. OFM staff told
us that OFM needs 5 business days to complete its work.
Plan Sponsors Invest Funds Not Yet Needed to Meet Expenses:
After plan sponsors receive Medicare payments at the start of each
month, plan sponsors told us they use any funds not immediately
expended to make short-term investments until drawn down to pay
providers and meet administrative expenses. Sponsors receive CMS
payments around the first of each month and incur expenses as bills
become due. Plan sponsors told us that they keep cash not yet needed to
meet expenses invested in low-interest, conservative, short-term
instruments such as Treasury bills and certificates of deposit until
expended.
Medicare prompt payment regulations require MA plan sponsors to make
payment for certain claims within a specified time frame on behalf of
plan enrollees. MA plan sponsors in our study reported that they
usually make capitation payments at the beginning of the month or prior
to the first of the month. They noted that once a provider's contract
term has begun the timing of sponsors' settlements usually cannot be
changed before the end of the contract period. In addition to
capitation, HMOs and other types of plans pay providers on a claims
basis. MA plan sponsors we spoke with told us that they receive medical
claims throughout the month and generally settle within 30 days,
although this could vary by provider.
For drug claims, the timing of Part D plan sponsors' payments to
pharmacies is set in their contracts and typically specifies within 30
days from when a claim is filed. A 2007 University of Texas study found
that the monthly median payment time for Part D claims processed from
March through December 2006 ranged from 27 to 33 days.[Footnote 37] In
May 2006, CMS reported that 18 of the top 20 Part D plans, covering 90
percent of beneficiaries, were paying pharmacies for claims twice
monthly.[Footnote 38] One plan sponsor in our study reported that their
Part D claims are batched and then paid once a week.
Because MA and Part D plan sponsors are at financial risk for the cost
of covered services provided to their enrollees, payments may exceed,
equal, or fall short of the actual cost of providing care. If start-of-
month Medicare payments are received faster than funds are spent,
sponsors may accumulate surpluses. Plan sponsors we interviewed said
they use any unexpended portion of their Medicare payments to make
short-term investments until the money is needed.
Income from the short-term investment of cash not yet needed to meet
expenses can play an important part in sponsors' cash management. The
financial gain from such investments is influenced by the timing of
sponsors' expenditures and how they invest their Medicare payments. The
five plan sponsors in our study varied in reporting the significance of
these investments to their business. A small rural plan sponsor and a
large nonprofit plan sponsor both stated that earnings from these
investments are an important source of revenue. Other sponsors stated
that while they use such investments as a revenue-generating
instrument, the earnings from short-term investments are not a major
source of revenue.
Alternative Payment Options Could Help Address Treasury's Cash
Management Challenges:
We developed several options that would either shift the timing of MA
and Part D payments away from the first of the month, and/or divide a
single payment into two or more payments. All of the options we
explored would reduce Treasury's cash management challenges, retain
predictable payments, and continue the current practice of treating all
plan sponsors equally. We developed illustrative estimates of the
potential interest cost reduction and reductions in Treasury's average
cash balances under alternative payment timing options.
We developed five options that illustrate a range of approaches to
changing payment timing. These options were selected to show
alternatives including a single payment per month, two payments per
month, and weekly payments.
Option 1: Make one payment on the 26th of the prior month.
Option 2: Make two payments, with half of that month's amount paid on
the 1ST and the other half on the 15th.
Option 3: Make two payments, with the first payment made on the 20TH of
the prior month and the remainder paid on the 10th of the month of
coverage.
Option 4: Make two retrospective payments with the first payment made
on the fourth Thursday of the month and the second payment on the
second Thursday of the following month.[Footnote 39]
Option 5: Make weekly payments on Thursdays, each payment equal to 1/4
or 1/5 of the monthly payment amount, depending on the number of
Thursdays in the month.[Footnote 40]
We developed two sets of illustrative estimates of the potential
interest cost reductions based on data from two time frames. One set of
estimates was based on monthly Treasury cash flow data covering the
period from October 2002 through December 2007. The other set of
estimates was based on a more limited period, covering the months after
the implementation of Medicare Part D in 2006, January 2006 through
December 2007. The longer period yielded a lower range of estimates for
the annual interest cost reduction and average monthly cash balances.
The (higher) estimate from the more recent sample should be given
greater consideration since it includes only the period during which
Part D was in effect. For both sets of estimates, for each $1 billion
reduction in average monthly cash balances, we estimated a reduction in
annual interest costs of about $53 million.
We estimated that these options would imply a reduction in the level of
Treasury's average monthly cash balance of from $720 million to $960
million (lower range) and from $1.28 billion to $1.73 billion (higher
range).[Footnote 41] The range of our estimates is summarized in table
1. Applying a 20-year historic average of the interest rates on 3-month
bills and 10-year Treasury notes to the estimated reduction in cash
balances implies a lower range reduction in annual interest costs of
about $40 million to $50 million and a higher range reduction of about
$70 million to $90 million. Over time these reductions would grow,
lowering federal interest costs from what they would otherwise be. We
projected these amounts over the next 10 years using CBO's baseline
projections of outlays for FY 2009 to 2018.
Table 1: Estimated Effects on Treasury's Cash Balances and Interest
Costs of Changing Payment Timing under GAO's Options Rounded to the
Nearest $10 Million:
Annual interest cost reduction:
Estimate based on October 2002 through December 2007 data: $40 to $50
million;
Estimate based on January 2006 through December 2007 data: $70 to $90
million.
10-year interest cost reduction:
Estimate based on October 2002 through December 2007 data: $500 to $670
million;
Estimate based on January 2006 through December 2007 data: $890 to
$1,200 million.
Source: GAO analysis of Treasury data.
Notes: Estimates do not reflect any potential offsetting effects.
Estimates for the reduction in average monthly cash balances and annual
interest cost reductions are on a calendar year basis; estimates for 10-
year interest cost reductions are on a fiscal year basis.
[End of table]
The ranges shown in table 1 reflect a gross reduction in Treasury's
interest expenses and do not include potential offsetting effects.
First, our estimates do not account for any interest Treasury could
earn from its excess cash balances in its short-term investment
programs. As discussed earlier in this report, Treasury faces capacity
concerns in which its ability to invest all available cash may be
hindered by a limited number of participants or insufficient collateral
available for depository institutions to secure Treasury's investments.
The actual impact on interest costs of any changes in payment timing
would depend on the level of cash Treasury holds, the interest rate
spread, and the timing of investments.
Second, CMS and CBO said they would expect plan sponsors to respond to
a change in payment timing, which could result in an increase in costs
to Medicare and beneficiaries. Most plan sponsors we spoke with
indicated that they would take steps to recoup any lost income by
increasing their bids. To the extent that plan sponsors do so, Medicare
payments to plans would rise. In addition, beneficiaries could face
increases in premiums, increases in cost sharing, reduced benefits, or
some combination of the three. These actions would have programmatic
effects that could raise the overall cost of Medicare, as discussed
later in the report. Our estimates in table 1 do not include a
quantification of these effects.[Footnote 42]
Changing Payment Timing Involves Balancing Treasury's Cash Management
Challenges, Administrative Impact on CMS, and Potential Impacts on
Medicare:
All the options we developed for changing payment timing would
facilitate Treasury's cash management, but CMS expressed concerns about
effects on its administrative burden. Among the options, Treasury said
that better alignment of payments with mid-month cash inflows from tax
deposits or with its regular borrowing schedule would do the most to
better align cash flows, but any change that reduced the size of the
start-of-month payments to plan sponsors would help address cash
management challenges. CMS, however, expressed concerns about changing
payment timing. For CMS a change that maintained the practice of
preparing Medicare plan payments once a month would have the least
effect on their operations.
Plan sponsors generally were opposed to any change in payment timing.
Sponsors told us that any losses in revenue resulting from a change in
payment timing would be reflected in their bids. This would increase
Medicare costs as well as raise beneficiaries' premiums and/or reduce
plan benefits. CMS OACT staff indicated that the impact of the change
in payment timing would depend on the option selected, whether some or
all sponsors changed their bids, and whether plan sponsors would seek
to fully or partially reflect revenue changes in their bids. In
general, OACT expected that most of the change in investment income
would affect sponsors' bids, but that the responses might vary by size
of plan sponsor. OACT noted that large sponsors might be less affected
by a reduction in the investment income generated from start-of-month
payments and that competition among Part D plans might serve as a
disincentive for sponsors to raise their bids.
Treasury Favors Payments Closely Aligned with Borrowing Schedule or Mid-
Month Tax Deposits:
Officials at Treasury told us that changes in payment that better align
cash inflows and outflows by shifting payments away from the start of
the month would facilitate cash and debt management. Treasury officials
suggested that one approach would be to shift part or all payments to
the middle of the month; another approach would be to make multiple
monthly payments that align with Treasury's regular borrowing schedule.
Treasury suggested payments on Thursdays because regular short-term
bills with 4-, 13-, and 26-week maturities are issued on Thursdays.
[Footnote 43] Treasury officials emphasized, however, that any change
in payment timing that better aligns Treasury's receipts and payments
would reduce the volatility of Treasury's cash flows, leading to
improved debt management and lower interest costs.
A senior Treasury official suggested that multiple monthly payments to
plan sponsors could be made while maintaining CMS's existing process of
calculating and certifying payments once each month. In comments on a
draft of this report, Treasury said it would welcome the opportunity to
review each of its payment systems with CMS to determine which
application best met their needs.
Approaches Whereby CMS Calculates and Certifies Payments Once per Month
Would Have Least Effect on Its Operations:
Asked about alternative payment options, CMS indicated that maintaining
the practice of preparing Medicare plan payments once per month would
have the least effect on its operations. Given the time required to
calculate and certify payment amounts, officials told us that
conducting these processes multiple times each month would increase
their workload proportionately. For example, processing payments two or
four times a month would double or quadruple the number of days devoted
to calculating and certifying payments. This increase in workload could
require a reallocation of staff to support the additional work.
CMS officials stated that the option to make the payment date the 26TH
of the previous month could be accommodated by moving the enrollment
cutoff date to earlier in the month. However, it would result in more
retroactive payment adjustments made in the month following the initial
month of coverage. Because beneficiaries who enroll after the cutoff
date are not included in the following month's payment, moving the
cutoff date forward would increase the period of time during which a
beneficiary could enroll in a plan and not be included in the next
month's payment.
Similarly, CMS officials told us that the agency could accommodate
other options to adjust the timing of Medicare payments as long as they
could maintain the practice of calculating and verifying amounts only
once each month. Thus, the options to pay plan sponsors on the 1ST and
15TH of each month, two Thursdays each month, or every Thursday would
have minimal impact on CMS if the options could be implemented in a way
that allows CMS to calculate and certify payments once a month as is
currently done.
In technical comments on a draft of this report, CMS said its payment
process would need to begin 2 weeks before the option's first payment
date. The earlier the payment calculation date, the earlier the cut-off
date for plan enrollment data. As noted, CMS said this would result in
larger retroactive payment adjustments because monthly payments would
be based on less current enrollment data.
Approaches under Which Sponsors Lose Investment Income from Start-of-
Month Payments May Affect Medicare Spending and Beneficiary Premiums:
Plan sponsors we interviewed generally told us that they would increase
or consider increasing their bids to recoup any lost investment income
and administrative costs resulting from a change in payment timing. If
bids were increased, Medicare's payments to plans would increase. There
would be increases in beneficiary premiums, increases in beneficiary
cost sharing, reduced benefits, or some combination of the three. Thus,
alternative payment timing options could raise costs to the Medicare
program and beneficiaries, depending on how plan sponsors reacted.
[Footnote 44]
Plan sponsors we spoke with generally said that they would likely
respond by increasing their MA and Part D bids to offset the lost
income from their short-term investments. Of the payment alternatives
we developed, the option to shift the payment date to the 26TH of the
previous month was the only one that plan sponsors we interviewed
generally did not see as raising issues. However, one plan sponsor
indicated that it did not want to receive payments prior to the first
of the month, expressing concern regarding end-of-year tax liabilities.
Staff at CBO and the CMS OACT also told us that they would expect plan
sponsors to respond to a change in payment timing by raising their
Medicare bids to offset any revenue decline. When we asked OACT staff
if they could quantify plans' responses to the options, they indicated
that the impact of the change in payment timing would depend on the
option selected, whether some or all sponsors changed their bids, and
whether sponsors would seek to fully or partially reflect revenue
changes in their bids. The staff expected that most of the change in
revenue would be reflected in plans' bids, particularly smaller
sponsors' bids. OACT provided estimates of the impact on federal
Medicare payments under each option, assuming that all plans reflected
all of the change in their revenue from short-term investment in their
bids. These upper bound estimates ranged from a reduction in federal
Medicare payments of $20 million per year to an increase in federal
Medicare payments of $120 million per year depending on the option
selected.[Footnote 45]
OACT staff said they would expect responses to the alternative payment
timing options to be influenced by how plan sponsors pay providers. For
example, if sponsors had to make capitated payments to providers on the
first of the month but did not receive their Medicare payments on that
date, they would need to draw down their reserves. If plan sponsors
received weekly Medicare payments, the effect would be more
significant; if they received a split payment--with half paid several
days early and the remainder several days after the first--there would
be no effect.
In addition, OACT staff indicated that a change in the timing of
Medicare payments could affect some Medicare plan sponsors more than
others. Smaller sponsors and those with significant growth in MA and
Part D enrollment would likely experience a more significant impact.
However, OACT said that because large plan sponsors have substantial
amounts of reserves--which they need to maintain in order to comply
with state laws--they would not be affected as much by a relatively
small loss in investment income and might not raise their bids. In
addition, OACT noted that competition among plans--particularly stand-
alone Part D plans--means that some sponsors might be unwilling to
raise their bid if doing so risks losing market share.
Conclusions:
All the options we developed for changing the timing of payment to
Medicare plans embody trade-offs in terms of their impacts on
Treasury's ability to manage the debt, CMS operations, and Medicare
plan sponsors. The specific trade-offs vary depending on the specifics
of a given option. For example, for purposes of cash management, the
option of making multiple payments on Thursdays would facilitate
Treasury's cash management by aligning payments with Treasury's regular
borrowing schedule, but plan sponsors told us that in response to such
a change they would raise their bids to compensate for either a
reduction in investment earnings or a need to borrow funds. All of the
options raise the question of how and to what extent the Medicare
program and Medicare beneficiaries will be affected if actions are
taken to address Treasury's cash management challenge. Both the current
system and any change raise issues of transparency--what is the cost of
the Medicare Advantage and Part D programs and where are those costs
shown in the budget.
Changes in timing and/or frequency of Medicare payments to plan
sponsors would need to be carefully considered in terms of the near-
term impacts on operations of both Treasury and CMS and whatever
actions sponsors might take in response that could increase federal
Medicare spending and adversely affect beneficiaries. Treasury
officials told us that they will work with CMS to review their payment
systems to facilitate an approach that makes multiple monthly payments
while still requiring only a single certification by CMS.
While implementation issues remain to be resolved, the benefits from
changing payment timing might include lower federal interest and debt
costs over time from what they would otherwise be if the misalignment
of cash flows continues or--as seems likely--increases. To be sure, the
net result of a change in payment timing is difficult to determine and
would depend on the details of the particular option chosen. Plan
sponsors we spoke with generally said that they would increase or
consider increasing their bids to fully or partially offset any revenue
loss due to a change in payment timing. OACT said that larger plan
sponsors would be better positioned to adjust to a change in payment
timing that would decrease their investment income. OACT also noted
that competitiveness concerns could give some plan sponsors a
disincentive to increase their bid. Even assuming, however, that
sponsors increase their Medicare bids sufficiently to entirely offset
any reductions in interest costs that accrue to the federal government,
a case can be made that this would increase transparency about the
costs of Medicare programs. Accordingly, we believe that while the
potential for higher Medicare spending should be considered, it should
not be the sole or determining factor of whether the current timing of
payments to Medicare plan sponsors should be changed.
Matter for Congressional Consideration:
In designing new programs, Congress should consider the nature of
Treasury's cash management challenge when enacting legislation that
specifies payment timing. Where payment timing is not specified,
Congress should direct the implementing agency to consult with Treasury
in establishing payment schedules.
Recommendation for Executive Action:
We recommend that the Secretary of the Treasury and the Administrator
of CMS expeditiously convene a joint interagency effort to study
options identified by GAO and any other options that would improve
Treasury's ability to manage cash flow and reduce overall interest
costs while not unduly increasing administrative burden for CMS.
For each option, the joint study should include discussion of:
* operational impacts on and likely consequences for cash management,
CMS, and Treasury operations;
* plan sponsors' likely responses and the consequences of these for the
Medicare program and beneficiaries;
* the expected change in federal costs and the distribution of any
increases or decreases;
* analysis of feasibility and mechanics of varying payment schedule by
size/scale of plan; and:
* what would be needed for implementation, including which options
would require statutory change and if so the specific changes
necessary.
Based on the work done and our discussions with Treasury officials, we
believe it is reasonable for this study to be completed by the end of
CY 2009.
Agency Comments and Our Evaluation:
We provided drafts of this report to Treasury and HHS. In addition to
comments on our recommendation, the agencies provided us with technical
comments that we incorporated where appropriate. We also obtained
comments from America's Health Insurance Plans (AHIP), a national
association representing nearly 1,300 health insurance companies.
Treasury agreed with our recommendation. The agency said that, given
the growth in Medicare payments experienced since 2005 and the
projections of continued growth, Treasury is very interested in finding
a beneficial solution that improves cash and debt management while not
unduly increasing administrative burden for CMS. Treasury also said
that it welcomed the opportunity to review its payment systems with CMS
and looked forward to finding a solution that is in the best interests
of the government. (See appendix III.)
CMS, on behalf of HHS, also agreed with our recommendation. The agency
remarked that it understands that a timing difference between cash
influx and outflows poses challenges for Treasury that, in turn, raise
borrowing and interest costs. CMS indicated that it is willing to work
with Treasury to study alternative payment timing options to address
the challenges as they relate to Medicare. (See appendix IV.)
AHIP representatives told us that overall the report captured
appropriately the views of the health plan industry. They also pointed
out that, among the payment timing options discussed in this report,
converting to a retrospective system would be particularly problematic
for plan sponsors because it would be fundamentally at odds with
historic and current practice used by both Medicare and commercial
health insurance payers. AHIP representatives reiterated that if a
change in payment timing reduced companies' investment income, plan
sponsors would take that into account by increasing their Medicare bids
to reflect the loss. Additionally, they noted that such a change would
likely necessitate revisions in the contracts plan sponsors have with
capitated providers to reflect the new payment timing arrangement.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution of it until 30
days from the date of this letter. We will then send copies of this
report to the Secretary of the Treasury and the Acting Administrator of
CMS as well as other interested parties. In addition, the report will
be available at no charge on the GAO Web site at [hyperlink,
http://www.gao.gov]. Please contact Susan J. Irving at (202)-512-8288
or irvings@gao.gov or James Cosgrove at (202) 512-7114 or
cosgrovej@gao.gov if you have any questions about this report. Key
contributors to this assignment were Jose Oyola, Rosamond Katz, Linda
Baker, Shirley Min, and Christina Serna.
Signed by:
Susan J. Irving:
Director for Federal Budget Analysis:
Strategic Issues:
Signed by:
James C. Cosgrove:
Director, Health Care:
[End of section]
Appendix I: Estimating the Effect of Medicare Payment Realignments on
Treasury's Interest Costs:
[End of section]
GAO estimated the potential reduction in Treasury interest costs from
improving the alignment between Treasury deposits and withdrawals (or,
equivalently, its receipts and expenditures) by moving payments to
Medicare plans for Medicare Advantage and Part D benefits away from the
first of the month. The lower range of our estimates suggests that
realigning Medicare private plan payments could reduce interest costs
between $498 million and $672 million over the 10-year budget window
from FY 2009 to FY 2018, depending on the realignment option chosen.
The upper range of our estimates suggests that the same options could
reduce interest costs between $891 million and $1,201 million ($1.2
billion) over the 10-year budget window.
The first step in our analysis, after compiling monthly values based on
daily data from October 2002 through December 2007, was to estimate a
relationship between Treasury's average monthly cash balances and the
volatility of Treasury's net deposits, where the latter is measured as
the standard deviation of daily deposits less withdrawals, excluding
those arising from debt issuances and redemptions.[Footnote 46] The
estimated relationship suggests that cash holdings rise in response to
increases in volatility and that the responsiveness of cash holdings to
volatility became substantially more pronounced after the full phase-in
of the Medicare Part D payments program in June 2006. Our lower range
interest cost reduction estimates are based on the cash balance/
volatility relationship estimated over our full data sample from
October 2002 through December 2007 while our higher range interest
reduction estimates are based on the relationship estimated over the
later part of the sample beginning in June 2006.
Our next step was to develop five different options for realigning
Medicare Advantage and Part D plan payments during CY 2007. After the
hypothetical redistribution of payments, we calculated the standard
deviation of Treasury deposits less withdrawals for each option. All
options reduced the volatility of net deposits. We then used the
estimated relationship between cash balances and volatility along with
each option's volatility reduction to derive the implied reduction in
Treasury's average cash balance in CY 2007.
Finally, to estimate the potential reduction in interest costs during
2007, we multiplied the cash balance reduction by an interest rate of
5.32 percent, which is the average of rates on 3-month Treasury bills
and 10-year Treasury notes over the 20-year period from 1988 through
2007. We extrapolated the 2007 interest cost reduction estimate over
the FY 2009 to FY 2018 budget window using CBO's projected growth in
total federal outlays.[Footnote 47]
The Analysis Used Monthly Data on Cash Balances, Deposits, Withdrawals,
and Other Variables Compiled from Daily Treasury Statements:
Our analysis used monthly data that we compiled from Daily Treasury
Statements covering the period from October 2002 through December 2007.
The dependent variable in our analysis was the average monthly cash
balance, which includes the effect of debt-related transactions. By
definition, the change in Treasury's cash balance equals total cash
deposits minus total cash withdrawals. Cash balances are affected not
only by tax receipts and payments for goods and services but also by
debt issuances and redemptions.
The principal explanatory variable in our analysis was the standard
deviation of deposits minus withdrawals, which is a measure of payment
volatility. The deposit and withdrawal flows used for this purpose
excluded debt issuances and debt redemptions. In essence, therefore,
our analysis treated debt-related transactions as a byproduct of
mismatches in the amount and timing of the underlying nondebt receipts
and expenditures. The exclusion of debt issuances and redemptions
facilitated our analysis. The shifts in the timing of Medicare payments
in our alternative scenarios would affect the timing and amount of debt
issuances and redemptions in a way that would be difficult for us to
represent. By using measures of receipts and expenditures that exclude
debt-related transactions, we did not have to make explicit assumptions
about the resulting changes in debt issuances and redemptions.
We also compiled several other monthly measures for consideration as
variables explaining cash balances. Among these were withdrawals--a
measure of the scale of outlays--and the rate of interest--a measure of
the cost of holding cash. We also created a dummy variable for each
month of the year to control for seasonal patterns in cash balances.
Apart from the volatility variable, selected monthly dummy variables,
and a moving average error term introduced to eliminate serial
correlation of the residuals, no other variable had a statistically
significant effect on Treasury's cash balances.[Footnote 48]
Greater Volatility Leads to Higher Treasury Cash Balances:
Table 2 presents the estimated relationship between Treasury's average
monthly cash balance and volatility as measured by the standard
deviation of deposits minus withdrawals. The results indicate that
greater volatility leads to higher Treasury cash balances. Conversely,
measures that would reduce volatility, such as realigning Medicare Part
D payments, would enable Treasury to hold lower cash balances and
thereby reduce the interest cost of holding cash. In addition to
contemporaneous and lagged values of the volatility measure, the
equations include several monthly dummy variables to control for
seasonal patterns in cash balances and moving average error terms to
mitigate serial correlation. All of the included variables have
coefficients that are significant at or below the .05 level, except for
the constant term in the equation that was estimated over the full
sample period.
Table 2: Regressions Explaining Treasury's Average Monthly Cash
Balance:
Constant:
A: Full sample: Coefficient: -4.825;
A: Full sample: t-Statistic: -1.20;
B: Recent portion of sample: Coefficient: - 32.499[A];
B: Recent portion of sample: t-Statistic: -5.89.
Volatility t:
A: Full sample: Coefficient: 1.196[A];
A: Full sample: t-Statistic: 7.16;
B: Recent portion of sample: Coefficient: 1.954[A];
B: Recent portion of sample: t-Statistic: 9.05.
Volatility t-1:
A: Full sample: Coefficient: 1.188[A];
A: Full sample: t-Statistic: 5.37;
B: Recent portion of sample: Coefficient: 1.759[A];
B: Recent portion of sample: t-Statistic: 7.23.
Volatility t-2;
A: Full sample: Coefficient: 0.379[B];
A: Full sample: t-Statistic: 2.23;
B: Recent portion of sample: Coefficient: 1.229[A];
B: Recent portion of sample: t-Statistic: 11.98.
January effect;
A: Full sample: Coefficient: 6.426[A];
A: Full sample: t-Statistic: 3.07;
B: Recent portion of sample: Coefficient: 13.227[A];
B: Recent portion of sample: t-Statistic: 8.82.
May effect;
A: Full sample: Coefficient: 11.856[B];
A: Full sample: t-Statistic: 2.07;
B: Recent portion of sample: Coefficient: 25.567[A];
B: Recent portion of sample: t-Statistic: 16.14.
June effect;
A: Full sample: Coefficient: 8.133[A];
A: Full sample: t-Statistic: 3.90;
B: Recent portion of sample: Coefficient: [Empty];
B: Recent portion of sample: t-Statistic: [Empty].
September effect;
A: Full sample: Coefficient: 10.776[A];
A: Full sample: t-Statistic: 4.98;
B: Recent portion of sample: Coefficient: 14.328[A];
B: Recent portion of sample: t-Statistic: 14.50.
Moving average error t-1;
A: Full sample: Coefficient: 0.411[A];
A: Full sample: t-Statistic: 3.38;
B: Recent portion of sample: Coefficient: [Empty];
B: Recent portion of sample: t-Statistic: [Empty].
Moving average error t-2;
A: Full sample: Coefficient: [Empty];
A: Full sample: t-Statistic: [Empty];
B: Recent portion of sample: Coefficient: -0.961[A];
B: Recent portion of sample: t-Statistic: -24.95.
Sample (adjusted): Included observations (after adjustments);
December 2002 - December 2007: 61;
June 2006 - December 2007: 19.
Sample (adjusted): R-squared;
December 2002 - December 2007: 0.718;
June 2006 - December 2007: 0.976.
Sample (adjusted): Adjusted R-squared;
December 2002 - December 2007: 0.674;
June 2006 - December 2007: 0.960.
Sample (adjusted): S.E. of regression;
December 2002 - December 2007: 5.352;
June 2006 - December 2007: 2.060.
Sample (adjusted): Durbin-Watson stat;
December 2002 - December 2007: 2.148;
June 2006 - December 2007: 1.720.
Source: GAO analysis of Treasury data.
Note: Estimated using Newey-West heteroskedasticity-and autocorrelation-
consistent standard errors and covariance.
[A] Significant at the 1 percent level.
[B] Significant at the 5 percent level.
[End of table]
As the table shows, first we estimated the relationship between cash
holdings and volatility over the entire sample for which we compiled
data, which runs from October 2002 through December 2007, truncated by
2 months because of the inclusion of two lagged values of the
volatility variable. Our estimates suggested that a structural change
occurred in the relationship between cash holdings and volatility after
the Medicare Part D program was fully operational in June 2006.
[Footnote 49] Accordingly, we reestimated the relationship using data
only for the more recent part of our sample, from June 2006 through
December 2007.[Footnote 50]
The recent-sample estimates suggest Treasury's cash holdings became
much more responsive to volatility after Medicare Part D payments were
fully phased in. The sum of the coefficients of the contemporaneous and
lagged values of the volatility variable was 4.94 in the equation
estimated using data from only the more recent portion of the sample
compared to 2.76 in the equation estimated using data from the entire
sample. We used these two sets of coefficients to derive an upper and
lower bound on our estimate of the reduction in cash balances and the
associated interest costs that might result from Medicare Part D
payment realignments.
Other variables usually hypothesized to affect cash holdings of firms
and households were also tested for inclusion in the equation. These
included withdrawals--a measure of expenditures--and the 3-month
Treasury rate. The estimated coefficients of the other variables we
tried were not statistically significant and were therefore excluded
from the equation estimates.[Footnote 51] To address serial correlation
of the error terms, we experimented with specifications involving
autoregressive and moving average error terms. We found that only one
moving average error term had a coefficient that was statistically
significant at the .05 level--a first order term in the full sample
estimate and a second order term in the more recent sample estimate.
[Footnote 52]
Interest Cost Reductions from Medicare Payment Realignments:
We developed five different options for realigning Medicare Advantage
and Part D plan payments. Instead of making these payments on the first
of the month, options 1 through 5 would redistribute the payments as
follows:
Option 1: One payment on the 26th of the prior month.
Option 2: Two payments, with half of that month's amount paid on the
1ST and the other half on the 15th.
Option 3: Two payments, with the first payment made on the 20TH of the
prior month and the remainder paid on the 10th of the month of
coverage.
Option 4: Two retrospective payments, with the first payment made on
the fourth Thursday of the month and the second payment on the second
Thursday of the following month.
Option 5: Weekly payments on Thursdays, each payment equal to 1/4 or
1/5 of the monthly payment amount, depending on the number of Thursdays
in the month.
We then calculated how much each option would reduce volatility, as
measured by the standard deviation of Treasury deposits less
withdrawals, from the actual volatility level in CY 2007. The
volatility reduction was then used in conjunction with the full-and
recent-sample equation estimates relating cash balances to volatility
shown in table 2 to calculate the implied reduction in Treasury's
average monthly cash balance. Table 3 provides the resulting
calculations. In long run equilibrium, the reduction in average monthly
cash is equal to the change in volatility multiplied by the sum of the
coefficients of the current and lagged values of the volatility
measure. As noted above, for the estimate using the full sample
(December 2002 through December 2007) the sum of the coefficients was
2.76, and for the estimate based on the more recent period (June 2006
through December 2007) the sum of the coefficients was 4.94, indicating
that cash balances became more responsive to volatility recently after
the full phase-in of the Medicare Part D program. Depending on the
payment realignment option chosen, the volatility reductions suggest
potential decreases in Treasury's average monthly cash balance ranging
from $.72 billion to $.96 billion in 2007 based on the full-sample
equation estimate and from $1.28 billion to $1.73 billion based on the
recent-sample equation estimate. (See table 3.)
Table 3: Estimated Reduction in Volatility, Cash Balance, and Interest
Cost:
Volatility (CY 2007 billion $)[A]:
Option 1: $11.61;
Option 2: $11.62;
Option 3: $11.58;
Option 4: $11.59;
Option 5: $11.53.
Volatility reduction (CY 2007 billion $)[B];
Option 1: $0.27;
Option 2: $0.26;
Option 3: $0.30;
Option 4: $0.29;
Option 5: $0.35.
Full sample estimate:
Cash balance reduction (CY 2007 billion $)[C];
Option 1: $0.75;
Option 2: $0.72;
Option 3: $0.83;
Option 4: $0.80;
Option 5: $0.96.
Interest Cost Reduction:
CY 2007 (million $)[D];
Option 1: $39.7;
Option 2: $38.1;
Option 3: $44.4;
Option 4: $42.6;
Option 5: $51.4.
Cumulative FY 2009 - 2018 (million $)[E];
Option 1: $518.9;
Option 2: $498.0;
Option 3: $580.2;
Option 4: $556.7;
Option 5: $671.5.
Recent sample estimate:
Cash balance reduction (CY 2007 billion $)[C];
Option 1: $1.33;
Option 2: $1.28;
Option 3: $1.49;
Option 4: $1.43;
Option 5: $1.73.
Interest Cost Reduction:
CY 2007 (million $)[D];
Option 1: $71.0;
Option 2: $68.1;
Option 3: $79.4;
Option 4: $76.2;
Option 5: $91.9.
Cumulative FY 2009 - 2018 (million $)[E];
Option 1: $928.4;
Option 2: $890.9;
Option 3: $1037.9;
Option 4: $995.9;
Option 5: $1201.3.
Source: GAO analysis of Treasury data.
[A] Volatility is the average of monthly values of the standard
deviation of daily Treasury deposits minus withdrawals, excluding
deposits and withdrawals related to debt issuances and redemptions.
[B] Volatility reduction is each option's reduction from the monthly
average actual 2007 level of 11.88.
[C] Cash balance reduction equals the change in volatility times the
sum of the coefficients of the current and lagged values of the
volatility terms in the equation estimate in table 2.
[D] Interest cost reduction for CY 2007 equals cash balance reduction
times the average of 3-month and 10-year Treasury rates over the 20
years from 1988 through 2007 (5.32 percent).
[E] Interest cost reduction from FY 2009 through FY 2018 was
extrapolated from the CY 2007reduction using the assumption that the
annual interest reduction grows at the same rate as CBO's projection of
total federal outlays.
Note: Estimates do not reflect any potential offsetting effects.
[End of table]
Treasury's cash balance needs to be financed by a corresponding amount
of outstanding Treasury debt. A reduction in Treasury's cash balance
thus would permit a reduction in its debt and the associated interest
payments. To evaluate the potential interest cost reduction for both
samples we multiplied the estimated cash balance reduction by the
average of 3-month and 10-year Treasury rates over the 20 years from
1988 through 2007, which was 5.32 percent. We used an interest rate
covering a longer term historical period in order to provide a
generally representative estimate of the interest cost reduction that
Treasury might achieve by reducing payment volatility. Based on the
estimated volatility and cash balance reductions in 2007, Treasury's 1-
year interest cost reduction ranges across options from $38.1 million
to $51.4 million based on the full-sample equation estimate and from
$68.1 million to $91.9 million based on the recent-sample estimate. The
(higher) estimate from the more recent sample should be given greater
consideration since it includes only the period during which Part D was
in effect.
In the final step of our analysis, we extrapolated the 1-year interest
cost reduction estimate over the 10-year budget window from FY 2009
through FY 2018 using the assumption that the reduction would grow at
the same rate that CBO projects for total federal outlays. The lower
range of our estimates suggests that realigning Medicare private plan
payments could reduce interest costs between $498 million and $672
million over the 10-year budget window from FY 2009 to FY 2018,
depending on the realignment option chosen. The upper range of our
estimates suggests that the same options could reduce interest costs
between $891 million and $1,201 million ($1.2 billion) over the 10-year
budget window.
More precise 10-year estimates generated using methods similar to those
used in our 1-year estimate are not feasible because 10-year
projections of Treasury's daily receipts and expenditures are not
available. Such daily projections would be needed to calculate
volatility under the baseline and each of the five options over the 10-
year budget window. Indexing the 1-year interest reduction to federal
outlays therefore seemed to be a reasonably conservative alternative
way of generating 10-year projections. One justification for this is
that we found that there was a significant correlation between our
volatility measure and total federal expenditures over our sample
period. With CBO projecting that total expenditures will rise about 4
percent annually over the 10-year budget window, volatility should also
rise. Similarly, CMS projections suggest that Medicare prescription
drug payments should rise about 10 percent annually over this period.
Thus, projections for both total federal spending and for Medicare
prescription drug payments suggest that volatility should increase in
the future. The implication is that the potential size of volatility
and interest cost reductions achievable through payment realignments
should also increase. As noted, the 10-year interest cost reduction
estimates provided in table 3 assume that the 1-year interest reduction
increases at the same rate as total federal outlays. A more
conservative approach of generating a long-run projection would be to
simply multiply the 1-year interest reduction by 10. A more aggressive
approach would be to increase the 1-year interest reduction at the rate
that CMS projects Medicare prescription payments will increase--
approximately 10 percent per year.
Limitations of Our Analysis:
In addition to the uncertainty inherent in extrapolations based on
statistical estimates, our estimates are subject to the limitation that
they exclude potential offsets to interest cost reductions. The
estimates represent the gross reduction in Treasury interest costs that
could result from a realignment of Medicare payments. However, Medicare
plans might raise their bids to CMS under some of the options we
proposed, which would raise the overall cost of Medicare. In addition,
our estimates do not reflect any of the offsetting interest income
Treasury could earn on the additional cash it holds. However,
Treasury's cash balance increments cannot always be seamlessly placed
in interest-earning vehicles.[Footnote 53]
To assess the reliability of data used in this study, we examined the
data to look for outliers and anomalies and addressed such issues as
appropriate. Where possible and appropriate, we corroborated the
results of our data analysis with other sources. On the basis of our
assessment we believe the data are reliable for the purposes of this
review.
[End of section]
Appendix II: CMS's Estimates of the Impact of Alternative Payment
Timing Options on Federal Medicare Payments to Plan Sponsors:
The CMS OACT analyzed the impact of the alternative payment timing
options we identified on federal Medicare MA and Part D payments. Table
4 below shows the OACT estimates for the change in federal payments to
the plan sponsors assuming that all of the change in sponsors'
investment income was reflected in their plan bids. OACT noted that,
because most of the impact from any gained or lost investment income
would likely be reflected in plan sponsors' bids, the impact on federal
payments would likely be a significant portion of the amounts shown
below.
Table 4: OACT Upper Bound Estimates of the Impact of Alternative
Payment Timing Options on Federal Medicare Payments to Plan Sponsors
(Dollars in millions):
Payment Timing Option: Option 1: One payment on the 26th of the prior
month;
Maximum change in federal payments: (-$20).
Payment Timing Option: Option 2: Two payments, with half of that
month's amount paid on the 1st and the other half on the 15th;
Maximum change in federal payments: 40.
Payment Timing Option: Option 3: Two payments, with the first payment
made on the 20th of the prior month and the remainder paid on the 10th
of the month of coverage;
Maximum change in federal payments: 0.
Payment Timing Option: Option 4: Two retrospective payments, with the
first payment made on the fourth Thursday of the month and the second
payment on the second Thursday of the following month;
Maximum change in federal payments: 120.
Payment Timing Option: Option 5: Weekly payments on Thursdays, each
payment equal to 1/4 or 1/5 of the monthly payment amount, depending on
the number of Thursdays in the month;
Maximum change in federal payments: $70.
Source: CMS, Office of the Actuary.
Note: Positive values represent higher Federal payments and negative
values represent a reduction in Federal payments. We have not
independently verified the estimates provided by OACT.
[End of table]
[End of section]
Appendix III: Comments from the Department of the Treasury:
Department Of The Treasury:
Assistant Secretary:
Washington, D.C.
December 22, 2008:
Ms. Susan J. Irving:
Director for Federal Budget Analysis:
Strategic Issues:
United States Government Accountability Office:
441 G. Street, N.W.
Washington, DC 20548:
Dear Ms. Irving:
We appreciate the opportunity to review and comment on the Government
Accountability Office's (GAO) draft report entitled, Debt Management:
Treasury's Cash Management Challenges and Timing of Payments to
Medicare Private Plans. The report recommends that the Secretary of the
Treasury and the Administrator of the Centers for Medicare and Medicaid
Services (CMS) expeditiously convene a joint inter-agency effort to
study the options identified by GAO and any other options that would
improve Treasury's ability to manage cash flow.
We welcome your recommendation to work with CMS to review the five
options presented in the report to align the payments to Medicare plan
sponsors with the government's cash receipts. Given the growth in
Medicare payments experienced since 2005 and the projections of
continued growth, Treasury is very interested in finding a beneficial
solution that improves cash and debt management while not unduly
increasing the administrative burden for CMS. We welcome the
opportunity to review each of our payment systems with CMS to determine
which application best meets their needs and look forward to finding a
solution that is in the best interests of the government.
We appreciate the professional manner in which you and your team
approached this engagement.
Sincerely:
Signed by:
Kenneth E. Carfine:
Fiscal Assistant Secretary:
[End of section]
Appendix IV: Comments from the Department of Health and Human Services:
Department Of Health & Human Services:
Office Of The Secretary
Assistant Secretary for Legislation:
Washington, DC 20201:
January 7, 2009:
James Cosgrove:
Director, Health Care:
U.S. Government Accountability Office:
441 G Street N.W.
Washington, DC 20548:
Dear Mr. Cosgrove:
Enclosed are comments on the U.S. Government Accountability Office's
(GAO) report entitled: "Debt Management: Treasury's Cash Management
Challenges and Timing of Payments to Medicare Private Plans" (GAO 09-
118).
The Department appreciates the opportunity to review this report before
its publication.
Sincerely,
Signed by:
Jennifer R. Luong, for:
Craig Burton:
Acting Assistant Secretary for Legislation:
Attachment:
Department Of Health & Human Services:
Centers for Medicare & Medicaid Services
200 Independence Avenue SW:
Washington, DC 20201:
Date: January 7, 2009:
To: Craig Burton:
Acting Assistant Secretary for Legislation:
Office of the Secretary:
From: [Signed by] Kerry Weems:
Acting Administrator:
Subject: Government Accountability Office (GAO) Draft Report: "Debt
Management: Treasury's Cash Management Challenges and Timing of
Payments to Medicare Private Plans" (GAO-09-118):
Thank you for the opportunity to review and comment on the GAO draft
report entitled. "Debt Management: Treasury's Cash Management
Challenges and Timing of Payments to Medicare Private Plans." The
Centers for Medicare & Medicaid Services (CMS) understands that a
timing difference between cash influx and outflows poses challenges for
the Department of Treasury (Treasury). which in turn raises borrowing
and interest costs. CMS is willing to work with Treasury to study
options to address cash influx and outflow challenges. as the
challenges relate to CMS.
We look forward to working with GAO and Treasury in the future on the
issues raised in this report. Our response to the recommendation and
other comments on the draft report follow.
GAO Recommendation:
The GAO recommends the Secretary of Treasury and the Administrator of
CMS convene a joint effort to study options to improve Treasury's
ability to manage cash now and reduce interest costs while not unduly
increasing administrative burden for CMS.
CMS Response:
The CMS agrees with the recommendation that it and Treasury work
together to study options to improve Treasury's ability to manage cash
flow and reduce interest costs while not unduly increasing CMS'
administrative burden.
[End of section]
Footnotes:
[1] See GAO, Debt Management: Treasury Has Refined Its Use of Cash
Management Bills but Should Explore Options That May Reduce Cost
Further, [hyperlink, http://www.gao.gov/products/GAO-06-269] (Mar. 30,
2006); GAO, Debt Management: Treasury Has Improved Short-Term
Investment Programs, but Should Broaden Investments to Reduce Risks and
Increase Return, [hyperlink, http://www.gao.gov/products/GAO-07-1105]
(Sept. 20, 2008); and GAO, Federal Debt: Answers to Frequently Asked
Questions, An Update, [hyperlink,
http://www.gao.gov/products/GAO-04-485SP] (August 2004).
[2] As discussed later in this report, Treasury's cash management
challenges are also complicated by the fact that Treasury needs to hold
precautionary cash balances to avoid an overdraft because the Federal
Reserve is not authorized to lend directly to Treasury.
[3] Medicare is the federally financed health insurance program for
persons aged 65 and over, certain individuals with disabilities, and
individuals with end-stage renal disease.
[4] Medicare FFS consists of Part A of title XVIII of the Social
Security Act, which covers inpatient stays, care in skilled nursing
facilities, hospice care, and some home health care; and Part B, which
covers certain physician, outpatient hospital, and laboratory services,
among other services. MA plans operate under Part C of the Social
Security Act.
[5] The Medicare Prescription Drug, Improvement, and Modernization Act
of 2003, Pub. L. No. 108-173, 117 Stat. 2066, created the Medicare
prescription drug program (Part D of title XVIII of the Social Security
Act), and changed the name of the Medicare+Choice program to Medicare
Advantage.
[6] In general, a person enrolled in an MA plan that also offers Part D
coverage may not enroll in a PDP. See the Social Security Act, §1860D-
1(a)(1)(B).
[7] These plans had a range of characteristics. They included a rural
plan, a stand-alone drug plan, and two plans that receive Medicare
payments exceeding $1 billion per month each in 2007.
[8] Calendar days.
[9] Changes have been made to the timing of Social Security benefit
payments for those who began drawing benefits after 1997. The changes
are expected to reduce the size of these payments over time. See
discussion later in this section.
[10] See [hyperlink, http://www.gao.gov/products/GAO-06-269].
[11] Until October 2008, Treasury was only permitted to invest its
excess cash balances in depository institutions and in obligations of
the U.S. government. Our review found that Treasury had improved its
short-term investment programs but needed to broaden its investments to
reduce risks and increase returns. Treasury had three short-term
investment programs for investment of excess cash balances: the TT&L
(Treasury Tax and Loan) program; the Term Investment Option (TIO)
offerings; and limited repurchase agreements (repo). A repo, or
repurchase agreement, is a form of short-term collateralized borrowing
used by dealers in government securities. Interest in TT&L investments
is set at the federal funds rate minus 25 basis points. In 2003,
Treasury established the TIO as a permanent program to improve returns.
In 2006, Treasury introduced a temporary repo pilot, which allowed it
to earn near-market rates of return. We recommended that if provided
the authority to do so, the Secretary of the Treasury implement a
permanent expanded repo program that could permit Treasury to earn a
higher rate of return, expand investment capacity, and reduce
concentration risk. Subsequent to the completion of our analysis,
section 502 of Pub. L. No. 110-351 (Oct. 7, 2008) amended section 323
of Title 31, U.S. Code, to authorize the Secretary of Treasury to
establish a permanent repo program.
[12] For example, in 2007 we reported that over the past couple of
years, Treasury had invested almost half of its TT&L deposits with one
depository institution. The TIO shares the same concentration risk and
raises capacity concerns in part because through 2006 TIO funds were
concentrated in two TIO participants.
[13] The TGA is the single account into which the funds that flow
through the federal government's accounts are rolled up at the end of
the day. The accounts are maintained at the 12 Federal Reserve banks.
[14] See [hyperlink, http://www.gao.gov/products/GAO-07-1105], appendix
III, for a historical overview of these issues. In the mid-1970s,
Treasury kept the bulk of its cash in the TGA account. On some
occasions the Federal Reserve was unable to offset the large swings in
the TGA balance through temporary open market operations, and it had to
request that Treasury redeposit funds in its TT&L accounts to avoid
having to make outright purchases of securities in the secondary
market. Treasury has had statutory authority to invest in TT&L notes
with depository institutions since 1977.
[15] Several plan sponsors have multiple contracts. The number of
payments made each month thus exceeds the number of plan sponsors.
According to CMS, over 750 separate contract payments occur each month,
and this number will grow to an estimated 900 contract payments in
2009.
[16] Payments for both Part C and Part D include beneficiary premium
amounts that are withheld from Social Security benefits. Beneficiaries
subject to MA or Part D premiums may choose to either reimburse the
plans directly or have the premiums deducted from their Social Security
checks. The premiums deducted from the Social Security checks are
transferred to the Medicare trust funds and then transferred from the
trust funds to the plans.
[17] See 42 C.F.R.§422.100(c)(2007). Additional benefits may, for
example, include coverage for vision and hearing services; reductions
in cost sharing--the amount a beneficiary pays for covered services;
and reductions in the premiums that many Medicare FFS beneficiaries
must pay for coverage for outpatient services and outpatient drugs.
[18] Beneficiaries enrolled in an MA plan that does not offer Part D
coverage have limited opportunities to enroll in a stand-alone
prescription drug plan.
[19] The catastrophic coverage phase begins when a beneficiary's out-
of-pocket costs reach $5,726 (in 2008). At that point, beneficiaries
contribute approximately 5 percent coinsurance toward their drug costs,
the Part D sponsors pay approximately 15 percent, and Medicare pays 80
percent.
[20] When the first of the month falls on a holiday or weekend, payment
is made on the previous business day.
[21] See Social Security Act §§ 1853(a)(1), 1860D-15(a). This schedule
for making plan payments reflects historical and standard practice.
[22] Other types of plans include provider sponsored organizations,
Medical Savings Accounts, and regional PPOs.
[23] Under capitation, plan sponsors pay a fixed amount for each
enrollee assigned to the provider irrespective of the number of covered
services provided.
[24] See 42 CFR § 422.520. Network contracted providers are not subject
to federal prompt payment rules but instead are governed by the payment
timing provisions of their contract terms.
[25] This requirement will not apply to pharmacies that dispense drugs
by mail order only or are located in, or contract with, a long-term
care facility. See Medicare Improvements for Patients and Providers Act
of 2008, Pub. L. No. 110-275, § 171, 122 Stat. 2494, 2578-80.
[26] See Figure 1.
[27] Calendar days.
[28] As discussed in our 2007 report, the coefficient of variation is
one measure of cash flow volatility. This measure is calculated by
dividing the standard deviation by the mean, and a larger percentage
indicates greater volatility. The coefficient of variation of
Treasury's daily operating cash balances was 80 percent in both FY 2006
and 2007, compared to 60 percent in FY 2003.
[29] The Treasury Borrowing Advisory Committee of the Securities
Industry and Financial Markets Association was chartered under the
Federal Advisory Committee Act, as amended, and is comprised of 14
members who represent securities firms, banks, and investor groups. The
Committee's members are nominated by the Chairman of the Committee, in
coordination with Treasury, are selected in coordination with the
Chairman of the Committee and Treasury, and approved by Treasury.
Following this meeting, Treasury reintroduced a 52-week bill; regularly
scheduled auctions for the bill take place every 4 weeks on Thursdays.
For minutes of the Committee's April 28, 2008, meeting, see [hyperlink,
http://www.treas.gov/press/releases/hp1002.htm] (accessed on June 17,
2008).
[30] Payments to Medicare fee-for-service providers are made daily as
claims are paid, including on the first of the month. In CY 07, a total
of $134 billion Medicare payments were made in first-of-month payments;
$120 billion, or about 90 percent, of this total was made to Medicare
health plans.
[31] That is, in months where the 1st of the month fell on a weekday,
in which case the Medicare payments to plans were made on the 1st.
Where the 1st fell on a weekend or holiday, the Medicare payment date
rolled back to the immediately preceding workday. Cash payments are net
of debt transactions (i.e., debt redemptions and issuances).
[32] Medicare spending on the MA program has grown rapidly in recent
years due to increases in both payment rates and enrollment. See GAO,
Medicare Advantage: Higher Spending Relative to Fee-for-Service May Not
Ensure Lower Out-of-Pocket Costs for Beneficiaries, GAO-08-522T (Feb.
28, 2008).
[33] CBO's estimates are from its March 2008 baseline.
[34] GAO analysis of CMS's calendar year estimates. This analysis
assumes that payments are evenly distributed throughout the year. CMS's
estimates reflect the Medicare Trustees' 2008 intermediate assumptions.
[35] The Medicare Improvements for Patients and Providers Act of 2008
(MIPPA), Pub. L. No. 110-275, 122 Stat. 2494, became law on July 15,
2008.
[36] MA plans provide both Part A and Part B benefits, which are paid
from the Hospital Insurance (HI) and Supplementary Medical Insurance
(SMI) Trust Funds. Part D benefits are paid from the Part D account in
the SMI Trust Fund.
[37] The study determined the time between the date of claim
adjudication (the date the plan approves the drug claim is usually the
dispensing date) and the date the pharmacy received payment from the
Part D plan. See M. Shepherd, K. Richards, and A. Winegar, Length of
Prescription Drug Payment Times by Medicare Part D Plans, (Austin,
Texas: Center for Pharmacoeconomic Studies: The University of Texas at
Austin, August 2007).
[38] Remarks of CMS Administrator Mark B. McClellan delivered to the
National Community Pharmacists Association 38th Legislation and
Government Conference, May 22, 2006.
[39] This option follows the current payment schedule for community-
rated plans in the Federal Employees Health Benefits Program (FEHBP).
[40] As discussed earlier in this report, under Treasury's regular
auction schedule, bills are settled on Thursdays.
[41] Our estimates suggest that making weekly payments on Thursdays
yielded the largest potential for interest cost reductions, and the
option of paying on the 1st and the 15th yielded the smallest.
[42] See discussion later in this report for the views of CMS's Office
of the Actuary on possible plan responses.
[43] Treasury also began reissuing regular 52-week bills in June 2008.
[44] Because premiums paid by beneficiaries in Medicare FFS are tied to
both Medicare FFS and MA program spending, additional payments to MA
plan sponsors result in higher premiums for all Medicare beneficiaries.
[45] OACT estimated a decrease in federal Medicare payments under the
option that would shift all sponsor payments to the 26th of the prior
month; and it estimated the largest increase in federal Medicare
payments for the option that would make two retrospective payments.
[46] We use the terms "net deposit volatility" or "volatility" to refer
to the standard deviation of daily deposits less withdrawals.
[47] Congressional Budget Office, An Analysis Of The President's
Budgetary Proposals For Fiscal Year 2009 (March 2008), Table A-1, p.
44.
[48] The variables excluded from the equation had estimated
coefficients that were not significant at the .05 level.
[49] A Chow-test shows that the null hypothesis of no structural break
at June 2006 can be rejected at the .05 level of significance (the p-
value for the F statistic was .0207).
[50] ADF tests applied to the cash balance and volatility measures
allow the rejection of the null hypothesis of a unit root at the.05
level, which indicates that the variables are stationary and that
applying OLS to their levels is appropriate.
[51] The variables excluded from the equation had estimated
coefficients that were not significant at the .05 level.
[52] With the inclusion of the MA term in each equation, a Breusch-
Godfrey test did not permit rejection of the null hypothesis that the
residuals are not serially correlated at the .05 level of significance.
[53] As noted in our report, following completion of our analysis,
section 502 of Pub. L. No. 110-351 (Oct. 7, 2008) amended section 323
of Title 31, U.S. Code, to authorize the Secretary of Treasury to
establish a permanent repo program.
[End of section]
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