Medicare Financial Management:

Further Improvements Needed to Establish Adequate Financial Control and Accountability

AIMD-00-66: Published: Mar 15, 2000. Publicly Released: Mar 15, 2000.

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Pursuant to a legislative requirement, GAO evaluated the Health Care Financing Administration's (HCFA) financial management activities to determine if they are sufficient to resolve financial management weaknesses identified through annual financial statement audits and other management-type reviews of HCFA's Medicare activities.

GAO noted that: (1) although HCFA is responsible for ensuring that the billions of dollars expended for Medicare each year are managed in a fiscally responsible way, it has not yet established an adequate foundation for control and accountability over the financial operations of the Medicare program; (2) HCFA's financial management activities are insufficient to resolve the internal control and financial reporting weaknesses identified through audits and other reviews; (3) while HCFA set and achieved goals for improving its audit opinion, many long-standing financial management weaknesses remain; (4) HCFA received an unqualified or clean opinion on its fiscal year (FY) 1999 financial statements, and its audit report was issued on time; (5) the audit report on HCFA's FY 1999 financial statements highlighted that many of the underlying control weaknesses reported in previous audits still exist; (6) financial statement audits have repeatedly cited claims contractors for internal control and financial reporting weaknesses; (7) despite the impact that these and other financial management weaknesses have on HCFA's ability to safeguard Medicare assets, HCFA's procedures for following up on audit findings and evaluating corrective actions to ensure they are appropriate and effectively implemented are insufficient; (8) HCFA's monitoring of contractor financial activities is also insufficient; (9) until recently, the scope of HCFA's oversight was limited, focusing mainly on contractor compliance with administrative budgets, which total about $1.6 billion annually, instead of focusing on the significant financial activities related to the approximately $170 billion expended to pay Medicare health benefit claims each year; (10) audit reports have also cited HCFA for inefficiencies in its internal financial reporting practices, including a lack of documented policies and procedures; (11) HCFA officials have begun several initiatives to enhance HCFA's ability to establish better control and accountability, such as hiring outside consultants to evaluate contractor internal controls; (12) however, HCFA does not have a comprehensive strategy to ensure successful implementation of the improvement initiatives, direct financial management activities, and sustain improvements in the long term; and (13) HCFA lacks long- and short-range plans that provide a basis for prioritizing financial management initiatives, clearly defining goals and objectives, establishing timeframes for completing initiatives, assigning responsibilities, and measuring performance.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: CMS developed an accounting procedures manual that documents the routine accounting procedures performed by financial management staff and the process followed in preparing the financial statements. The completed chapters of the manual relate to accounting and reporting for the Medicare program. These chapters are written in accordance with federal accounting standards. They help increase reliability in CMS financial reporting. The procedures also help promote a uniform understanding of accounting policy among CMS financial management staff. CMS also has drafted chapters of the manual related to accounting and reporting for the Medicaid program. Final issuance is expected by September 30, 2002.

    Recommendation: To improve financial management and accountability in the Medicare program, the Administrator, HCFA, should direct the Chief Financial Officer to improve internal financial reporting processes by developing comprehensive policies and procedures that clearly define: (1) the process to be followed in preparing the financial statements; (2) the routine accounting procedures performed by the Office of Financial Management; and (3) the number of staff and skills needed to carry out responsibilities.

    Agency Affected: Department of Health and Human Services: Health Care Financing Administration

  2. Status: Closed - Implemented

    Comments: CMS has taken numerous actions to improve its guidance to Medicare contractors. For example, CMS updated and issued 19 program memoranda that provide contractors with policy guidance on several longstanding financial reporting problems, such as untimely cost reporting, untimely debt transfers, and inappropriate allocation of funds expended between the Medicare trust funds. The fiscal year 2001 financial statement audit showed a decline in the number of audit findings in these areas since guidance was issued. CMS also developed an Internet-accessible database that consolidates all financial management related guidance including recently issued program memoranda. This database provides contractors with easier access to key financial management regulations that were contained in several manuals. HCFA is committed to updating and revising the manual on a periodic basis, while incorporating the results from oversight activities, such as the CFO audit, SAS-70 reviews, self-certification reviews, Office of Inspector General reviews, and GAO reviews to enhance and refine guidance.

    Recommendation: To improve financial management and accountability in the Medicare program, the Administrator, HCFA, should direct the Chief Financial Officer to improve guidance to contractors for executing Medicare financial activities by ensuring that the current initiative to develop a comprehensive contractor financial management manual: (1) solicits input from contractors on the areas where better guidance is needed to address long-standing internal control weaknesses, such as specific instructions on allocation of cash receipts between the two Medicare trust funds; (2) includes steps for ongoing updating of guidance; (3) articulates how the manual will be used and implemented; (4) uses the results of audit findings and oversight reviews to determine areas where more complete and detailed guidance to contractors is needed; and (5) reviews the contractor fiscal intermediary and carrier manuals to determine which sections need updating.

    Agency Affected: Department of Health and Human Services: Health Care Financing Administration

  3. Status: Closed - Implemented

    Comments: In 2002, GAO reported that CMS developed financial analysis and risk assessment procedures to improve oversight of contractor financial activities, including analytical tools to perform trend analysis of critical financial data. Using these tools, CMS identified unusual variances in Medicare accounts receivable amounts, including a $198 million overstatement in one contractor's accounts receivable balance. CMS also developed risk assessment factors to use in identifying high risk contractors. The risk factors include dollar value of expenditures, dollar value of accounts receivable, and the number of outstanding audit findings. These procedures helped CMS target limited resources to test internal control of high risk contractors. CMS also hired additional staff to establish a formal review process and perform analytical reviews of the accounts receivable activity and other Medicare contractor reported data. This staff works with central and regional office staff in sharing the analytical tools and results. GAO did, however, identify several deficiencies in CMS' actions to address this recommendation. Specifically, CMS had not established mechanisms to archive trend analysis results and historical data on Medicare contractors for future analysis. In GAO's 2004 follow up, CMS provided GAO documentation to show that it now maintains Medicare contractor trend analysis data in Excel files for current and prior periods. CMS uses this data to perform trend analysis comparing periods to identify unusual financial activities that may impact the accuracy of Medicare expenditures. These actions are sufficient to close the recommendation.

    Recommendation: To improve financial management and accountability in the Medicare program, the Administrator, HCFA, should direct the Chief Financial Officer to improve the agency's ability to detect irregular financial activities and identify high risk contractors by: (1) developing analysis and risk assessment procedures that detect unusual variances and patterns in the amounts of funds withdrawn, funds expended, bank balances, accounts receivable, accounts payable, and other key financial data reported by contractors; and (2) coordinating and sharing analysis and risk assessment methodologies with central and regional office staff responsible for contractor monitoring and oversight.

    Agency Affected: Department of Health and Human Services: Health Care Financing Administration

  4. Status: Closed - Implemented

    Comments: In 2002, GAO reported that CMS had made progress in refining and expanding review procedures to improve oversight of contractor financial activities. CMS had expanded the internal control objectives used in evaluating contractors' financial operations. The revised internal control objectives provide CMS with more criteria for evaluating whether contractors properly record and document financial transactions and clarify internal control requirements for contractors. CMS also refined the types of internal control reviews conducted annually. For example, CMS performed reviews that tested whether stated internal controls were in place and operating effectively at some 13 contractors during fiscal year 2001. CMS also instituted a review to verify that the process contractors follow in annually assessing internal control and reporting results to CMS is adequately supported. GAO found however, that although CMS had made significant improvement, its efforts to refine and expand review of contractors' financial activities had not included ongoing review of monthly expenditure reports that are important for monitoring contractor financial operations. CMS reported that it was developing procedures for reviewing the monthly expenditure report. In GAO's 2004 follow-up, CMS provided GAO documentation to show that it has developed procedures for review of Medicare contractors' monthly expenditure reports. CMS performed reviews at 12 Medicare contractors in fiscal year (FY) 2003 and has plans to conduct reviews for another sample of contractors in FY 2004. The CMS review team consisted of all accountants with the requisite skills to perform these reviews. This action is sufficient to close the recommendation.

    Recommendation: To improve financial management and accountability in the Medicare program, the Administrator, HCFA, should direct the Chief Financial Officer to improve oversight of contractor financial activities by working with the central and regional office staff responsible for annual contractor performance evaluations to: (1) refine and expand procedures for review of contractor financial activities; (2) provide staff with the necessary skills to evaluate contractor financial activities; and (3) identify specific contractors and financial activities to be reviewed.

    Agency Affected: Department of Health and Human Services: Health Care Financing Administration

  5. Status: Closed - Implemented

    Comments: In 2002, GAO reported that CMS had developed procedures to direct audit evaluation and resolution activities. However, CMS had not formulated a strategy to ensure that implementation of these procedures is coordinated between central and regional staff. (See status and update for recommendation 1 above). In GAO's 2004 follow-up, CMS provided GAO with copies of roles and responsibilities for audit evaluation and resolution activities which showed that implementation of these procedures had been coordinated between central and regional office staff. These actions are sufficient to close the recommendation.

    Recommendation: To improve financial management and accountability in the Medicare program, the Administrator, HCFA, should direct the Chief Financial Officer to, in developing procedures, coordinate with the central and regional office staff responsible for contractor oversight to ensure that resources are applied appropriately for timely follow-up with contractors on implementation of corrective actions to address financial statement audit findings.

    Agency Affected: Department of Health and Human Services: Health Care Financing Administration

  6. Status: Open

    Comments: In 2002, GAO reported that CMS developed and issued written procedures that provide staff with guidance for evaluating audit findings from all financial related reviews, and steps to follow in resolving the weaknesses identified. The procedures clarify requirements that contractors must adhere to in submitting corrective action plans that address identified weaknesses. They also provide CMS staff with instructions on how to evaluate the adequacy of the contractors' plans. CMS also developed and implemented systems to track findings from the four types of financial oversight reviews conducted annually at selected contractors. These systems have helped ensure that all weaknesses reported by the contractors are tracked. CMS also established a work group of central and regional staff to develop a strategy for ensuring that contractors take action to address weaknesses identified from audits. This work group is responsible for developing procedures for monitoring contractors' actions and designating the central and regional staff to carry out the procedures. However, GAO found that although improvements have been made, the current process for tracking audit findings is inefficient because staff must manually enter audit findings from different audits into four separate tracking systems. The separate systems hinder CMS's ability to obtain a comprehensive summary of contractor problems and ensure timely resolution of all issues. In 2003, CMS began developing a combined system for tracking audit findings and contractor corrective action plans that will address the inefficiencies. During GAO's 2004 follow-up, CMS reported that it has implemented the major part of the system. The tracking system has two parts, the database and the spreadsheet application, called the Quarterly Corrective Action Plan (CAP) report. Medicare contractors have started using the spreadsheet application to enter CAPs, and the database portion of the system will be completed later this year.

    Recommendation: To improve financial management and accountability in the Medicare program, the Administrator, HCFA, should direct the Chief Financial Officer to improve procedures for evaluating and resolving findings from annual financial statements audits by developing, documenting, and implementing procedures so that managers promptly evaluate audit findings, determine proper actions in response to audit findings, and complete within established timeframes all actions that resolve the findings brought to management's attention.

    Agency Affected: Department of Health and Human Services: Health Care Financing Administration

  7. Status: Closed - Implemented

    Comments: CMS developed a Comprehensive Plan and Strategy for Financial Management in November 2000, and issued its second update of the plan in 2002. The plan defines financial management goals, objectives, and specific corrective actions to address financial management weaknesses. The plan is supported by annual project plans that identify milestones for achieving goals and initiatives in the overall plan. The comprehensive plan includes requirements for an integrated financial management system. CMS has developed a detailed systems architecture and project plans for the Healthcare Integrated General Ledger Accounting System, which is designed to eliminate the ad hoc spread sheets applications used to record and report financial information and fully integrate Medicare contractor and CMS accounting systems. Implementation is expected by 2007. CMS' long-term human capital needs assessment will be accomplished through CMS' agency-wide workhorse planning project, which began in 1999. This project will determine the required skills and competencies needed for Medicare financial management, and assist managers in developing a strategy for addressing the deficiencies. The human capital needs assessment project is scheduled to be completed in 2003.

    Recommendation: To improve financial management and accountability in the Medicare program, the Administrator, HCFA, should direct the Chief Financial Officer to develop a comprehensive financial management strategy that clearly: (1) defines financial management objectives and goals; (2) specifies corrective actions to address financial management weaknesses; (3) include target dates and resources necessary to implement corrective actions; (4) identifies offices and staff responsible for carrying out the corrective actions; (5) provides clear implementation plans that link the various financial management improvement initiatives underway and alternative plans in the event these reviews cannot be continued; (6) provides details on the systems architecture and requirements needed for its integrated financial management systems; and (7) includes a human capital needs assessment.

    Agency Affected: Department of Health and Human Services: Health Care Financing Administration

 

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