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entitled 'Medicare Contracting Reform: CMS's Plan Has Gaps and Its 
Anticipated Savings Are Uncertain' which was released on August 17, 
2005. 

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Report to Congressional Committees: 

United States Government Accountability Office: 

GAO: 

August 2005: 

Medicare Contracting Reform: 

CMS's Plan Has Gaps and Its Anticipated Savings Are Uncertain: 

GAO-05-873: 

GAO Highlights: 

Highlights of GAO-05-873, a report to congressional committees: 

Why GAO Did This Study: 

The Medicare Prescription Drug, Improvement, and Modernization Act of 
2003 (MMA) significantly reformed contracting for the administration of 
claims for Part A, Medicare’s hospital insurance, and Part B, which 
covers outpatient services such as physicians’ care. The MMA required 
the Centers for Medicare & Medicaid Services (CMS)—the agency within 
the Department of Health and Human Services (HHS) that administers 
Medicare—to conduct full and open competition for all of its claims 
administration contracts and to transfer the work to Medicare 
administrative contractors (MAC) by October 2011. The MMA required the 
Secretary of HHS to submit a report to the Congress and GAO on the plan 
for implementing Medicare contracting reform and for GAO to evaluate 
the plan. To address this mandate, GAO reviewed the extent to which (1) 
the plan provides an appropriate framework for implementing Medicare 
contracting reform and (2) the plan’s cost and savings estimates are 
sound enough to support decisions on implementation. 

What GAO Found: 

CMS’s plan provides an appropriate framework to implement contracting 
reform in some critical areas but not in others. For example, the plan 
indicates the rationale for reform but lacks a detailed schedule to 
coordinate reform activities with other major initiatives CMS intends 
to implement at the MACs during the same period. Further, CMS’s plan 
does not comprehensively detail steps to address potential risks during 
the transitions of the claims workload from the current contractors, 
such as failing to pay providers or paying them improperly. These 
transitions will be complex to manage because they require moving 
multiple claims workloads from current contractors to a single MAC with 
new jurisdictional lines. As the figure shows, as many as nine separate 
segments of current contractors’ workload will be moved to the first 
A/B MAC. CMS has accelerated its schedule to transfer the current 
contractor claims workload to MACs by 2009, more than 2 years ahead of 
the MMA’s time frame. This schedule leaves little time for CMS to 
adjust for any problems encountered. 

Part A and Part B Transitions That Will Occur in One MAC Jurisdiction: 

[See PDF for image] 

[End of figure] 

CMS’s estimates of costs and savings are too uncertain to support 
decisions on contracting reform implementation. First, CMS’s internal 
cost estimate for a 6-year implementation period of about $666 million 
is based on reasonable data but questionable assumptions about contract 
awards. Second, its estimate of $1.4 billion in savings from reductions 
in improper payment by MACs depends on questionable evidence and 
assumptions that were never validated by knowledgeable CMS staff. 
However, the $1.4 billion estimate prompted CMS to accelerate its 
implementation schedule to accrue savings as rapidly as possible. While 
it is reasonable to assume that contracting reform will result in 
savings, the actual amount could differ greatly from the estimate. 
Basing an accelerated implementation schedule on uncertain savings 
raises concerns that CMS has unnecessarily created additional 
challenges to effectively managing the risk of these transitions. 

What GAO Recommends: 

GAO recommends that CMS extend its implementation schedule from 2009 to 
2011, to be better prepared to manage contracting reform. CMS did not 
concur with the recommendation, but GAO believes that extending the 
time frame is the most prudent approach to manage contracting reform 
risks. 

www.gao.gov/cgi-bin/getrpt?GAO-05-873. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Leslie G. Aronovitz at 
(312) 220-7600 or aronovitzl@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

CMS's Plan Does Not Provide an Appropriate Implementation Framework in 
All Critical Areas: 

Plan's Cost and Savings Estimates Do Not Provide a Reasonable Basis for 
Decision Making: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Documents CMS Officials Have Identified as Constituting the 
Agency's Plan for Implementing Contracting Reform: 

Appendix II: Documents Used by GAO to Develop Criteria for Reviewing 
CMS's Plan for Contracting Reform: 

Appendix III: GAO's Criteria for Evaluating CMS's Contracting Reform 
Plan: 

Appendix IV: Scope and Methodology: 

Appendix V: Comments from the Department of Health and Human Services: 

Appendix VI: CMS's MAC Procurement and Transition Schedule: 

Appendix VII: Jurisdictional Map of the Current Fiscal Intermediaries: 

Appendix VIII: Jurisdictional Map of the Current Carriers: 

Appendix IX: Jurisdictional Map of the Current Regional Home Health 
Intermediaries: 

Appendix X: Jurisdictional Map of the Current Durable Medical Equipment 
Regional Carriers: 

Appendix XI: Jurisdictional Map of the 15 New Medicare Administrative 
Contractors: 

Appendix XII: Jurisdictional Map of the Four DME MACs and the Four HH 
MACs: 

Tables: 

Table 1: CMS's Analysis of Restrictions or Weaknesses in Medicare 
Claims Administration Contracting and Their Associated Effects: 

Table 2: Key Initiatives Affecting MAC Implementation: 

Table 3: CMS's Estimates of Administrative Costs for Medicare 
Contracting Reform, Fiscal Years 2006-2011, as of February 2005: 

Table 4: CMS's Estimates of Administrative Savings from Medicare 
Contracting Reform, Fiscal Years 2006-2011, as of February 2005: 

Table 5: CMS's Consultant's Estimates of Savings to the Trust Funds 
from Medicare Contracting Reform, Fiscal Years 2006-2011: 

Figures: 

Figure 1: Areas of Detailed Information in CMS's Contracting Reform 
Plan: 

Figure 2: Part A and Part B Transitions That Will Occur in One MAC 
Jurisdiction: 

Figure 3: Estimated Costs of Medicare Contracting Reform, Fiscal Years 
2006-2011, as of February 2005: 

Figure 4: CMS's Annual Estimates of Administrative Costs and Savings 
from Medicare Contracting Reform, Fiscal Years 2006-2011, as of 
February 2005: 

Figure 5: CMS's MAC Procurement and Transition Schedule: 

Abbreviations: 

BCC: beneficiary contact centers: 
CMS: Centers for Medicare & Medicaid Services: 
DME: durable medical equipment: 
DOD: Department of Defense: 
FAR: Federal Acquisition Regulation: 
HH: home health and hospice: 
HHS: Department of Health and Human Services: 
HIGLAS: Healthcare Integrated General Ledger Accounting System: 
IT: information technology: 
MAC: Medicare administrative contractor: 
MMA: Medicare Prescription Drug, Improvement, and Modernization Act of 
2003: 
PSC: program safeguard contractor: 

United States Government Accountability Office: 

Washington, DC 20548: 

August 17, 2005: 

The Honorable Charles E. Grassley: 
Chairman: 
The Honorable Max Baucus: 
Ranking Minority Member: 
Committee on Finance: 
United States Senate: 

The Honorable Joe Barton: 
Chairman: 
The Honorable John D. Dingell: 
Ranking Minority Member: 
Committee on Energy and Commerce: 
House of Representatives: 

The Honorable William M. Thomas: 
Chairman:
The Honorable Charles B. Rangel: 
Ranking Minority Member: 
Committee on Ways and Means: 
House of Representatives: 

Since the inception of the Medicare program in 1965, the contractors 
that process and administer medical claims have played a critical role 
in serving both beneficiaries and providers. For example, in fiscal 
year 2004, these contractors processed over 1 billion health care 
claims and provided customer service to about 36 million beneficiaries 
and over 1 million health care providers. The Medicare Prescription 
Drug, Improvement, and Modernization Act of 2003 (MMA)[Footnote 1] 
significantly changed Medicare law covering contracting for claims 
administration services by the Centers for Medicare & Medicaid Services 
(CMS)[Footnote 2]--the agency within the Department of Health and Human 
Services (HHS) that administers the program. CMS refers to these 
changes, which are intended to improve service to beneficiaries and 
health care providers, as Medicare contracting reform. 

The implementation of contracting reform will fundamentally change 
Medicare claims administration contracting practices. Since the 
beginning of the Medicare program, CMS has generally been exempt from 
requirements to competitively select claims administration contractors 
or follow certain other procedures that usually apply to the selection 
and management of government contractors. However, the MMA required CMS 
to use competitive procedures to select Medicare administrative 
contractors (MAC) and to follow the Federal Acquisition Regulation 
(FAR),[Footnote 3] except where specific MMA provisions differ. The MMA 
required CMS to transfer the work of current claims administration 
contractors to MACs by October 2011. It also required the Secretary of 
HHS to submit a report to the Congress and GAO on HHS's plan to 
implement the Medicare contracting reform provisions by October 1, 
2004. This report was submitted on February 7, 2005.[Footnote 4] CMS 
has designated the Report to Congress and related documents, taken 
together, as its plan for implementing Medicare contracting reform. 
These documents are listed in appendix I. 

The MMA also required GAO to evaluate and report on CMS's contracting 
reform plan no later than 6 months after the date that CMS's report was 
received. To address this mandate, as discussed with the committees of 
jurisdiction, we reviewed (1) the extent to which the plan provides an 
appropriate framework for implementing Medicare contracting reform and 
(2) the extent to which the plan's cost and savings estimates are sound 
enough to support decisions on contracting reform implementation. 

In preparing this report, we reviewed relevant sections of the MMA, 
documents prepared to help CMS plan for contracting reform, and GAO 
guidance on assessing federal agencies' procurement functions and 
improving how mission-critical work is accomplished. These documents 
are listed in appendix II. From these documents, we developed 
evaluation criteria and used them to review CMS's contracting reform 
plan.[Footnote 5] Our evaluation criteria are presented in appendix 
III. We also reviewed the information and assumptions on which the 
plan's cost and savings estimates were based. In addition, we 
interviewed officials at CMS's headquarters and regional offices, four 
current Medicare claims administration contractors, and CMS's actuarial 
contractor about the contracting reform plan and how it was developed. 
Appendix IV includes a more detailed discussion of our scope and 
methodology. We performed our work from November 2004 through July 2005 
in accordance with generally accepted government auditing standards. 

Results in Brief: 

CMS's plan for contracting reform provides detailed information and an 
appropriate implementation framework in some critical areas but not in 
others. For example, the plan provides detailed information on the 
reasons for, and benefits expected from, contracting reform; the 
organization of current and future Medicare claims administration 
contractors; the MAC contracting implementation schedule; and CMS's 
strategy for communicating information to potential contractors, 
providers, and beneficiaries. On the other hand, the plan does not 
provide detailed information on the risks of contracting reform and 
steps to mitigate them. Implementation of contracting reform is an 
inherently high-risk activity because it will involve complex 
transitions of claims workloads from current contractors to MACs. CMS 
has experience in transferring up to 10 percent of the claims 
administration workload in a year. In 13 of the past 15 years, CMS has 
transferred at least one contractor's workload, during transitions that 
took an average of 6 to 9 months, with some lasting as long as a year. 
However, the scale of the proposed transitions is much greater, since 
CMS plans to transfer as much as 91 percent of the annual Medicare 
claims processing workload--which represents an estimated $250 billion 
in payments to providers--to MACs in less than 2 years. Furthermore, 
CMS is proposing to transfer all work to MACs by July 2009, which is 
more than 2 years ahead of the MMA's specified time frame. If these 
transitions go awry, physicians and other providers could experience 
payment delays and errors. Further, the plan does not fully detail how 
CMS intends to implement MAC contracting. For example, the plan does 
not fully explain CMS's strategy for monitoring MACs' performance. In 
addition, the plan does not fully explain how CMS will manage 
contracting reform while also implementing the Medicare prescription 
drug benefit and the expansion of options available to Medicare 
beneficiaries who enroll in private plans. Finally, it does not detail 
how CMS will coordinate the scheduling of contracting reform activities 
with other interrelated initiatives that must be implemented 
concurrently at the MACs, such as upgrades to CMS's information and 
accounting systems. Having a schedule for implementing the interrelated 
initiatives is critical, because delays in one initiative could easily 
affect others. CMS officials have taken initial steps to deal with 
critical areas that are not fully developed, but they have not 
completed planning for them. For example, officials have identified 
some factors that may pose a risk to MAC implementation, but they have 
not decided on steps to mitigate them. 

The plan's cost and savings estimates are too uncertain to support 
decisions on contracting reform implementation because they are based 
on future developments that are difficult to predict. CMS estimates 
that contracting reform would cost about $666 million to implement 
during a 6-year period, a much higher amount than the one indicated in 
the Report to Congress, because that document did not include funding 
anticipated to be needed beyond 2006. CMS used its data on the costs of 
previous transitions of claims workloads from one contractor to another 
as a basis to develop a transition cost amount. However, to develop an 
overall cost estimate, CMS had to make assumptions about how many 
contractors will take on new claims workloads and the size of these 
workload transitions. Because CMS does not know which contractors will 
compete and win contracts for specific workloads, it is difficult to 
predict how much contracting reform implementation will cost. Second, 
the total savings estimate of over $1.9 billion for a 6-year 
implementation period relies on the expectation that MACs will reduce 
improper payments by over $1.4 billion through more effective medical 
reviews of claims. The $1.4 billion savings estimate, which was 
developed by an external consultant, is based on questionable evidence 
and assumptions that were not validated by the CMS staff who oversee 
medical reviews. While it is reasonable to assume that contracting 
reform will eventually lead to program savings, the exact level of 
savings is impossible to predict and could differ greatly from the 
consultant's estimates. Despite this, in order to benefit from the 
projected savings as soon as possible, CMS accelerated its 
implementation schedule for contracting reform. Basing an accelerated 
implementation schedule on such uncertain savings raises concerns that 
CMS has unnecessarily created additional challenges to effectively 
managing the risks and complexities of contracting reform. As a result, 
we recommend that CMS extend its implementation schedule to complete 
its workload transitions by October 2011, so that the agency can be 
better prepared to manage its contracting reform activities. 

In its written comments on a draft of this report, CMS did not concur 
with our recommendation. (See app. V). CMS stated that it would be able 
to achieve savings to the Medicare trust funds and operational 
efficiencies more quickly by fully implementing MAC contracting in 
2009. We believe that our recommendation to extend the time frame for 
implementation represents a prudent approach that would allow more time 
for planning and better enable CMS to manage complex transitions and 
make needed midcourse adjustments. 

Background: 

Federal agencies are generally permitted to contract with any qualified 
entity for any authorized purpose so long as that entity is not 
prohibited from receiving government contracts and the contract is not 
for an inherently governmental function. Agencies are required to use 
contractors that have a satisfactory record of integrity and business 
ethics, a record of successful past performance, and the financial and 
other resources needed to perform the contract. The FAR generally 
requires agencies to conduct full and open competition for contracts. 
Under the FAR, a federal agency may terminate a contract either for the 
government's convenience or if the agency determines that the 
contractor is in default. The contractor does not have similar rights 
to terminate its contract with the government. The FAR also provides 
agencies with several methods to pay contractors--some of which allow 
for financial incentives for meeting performance goals. 

Because of provisions in the Social Security Act, Medicare claims 
administration contracting had unique features that differed from most 
other federal contracting. Before Medicare was enacted in 1965, 
providers had been concerned that the program would give the government 
too much control over health care. To increase providers' acceptance of 
the new program, the Congress ensured that health insurers like Blue 
Cross and Blue Shield, which already served as payers of health care 
services to physicians and hospitals, became the contractors paying 
providers for Medicare services. Medicare's authorizing legislation 
specified that contractors called fiscal intermediaries would 
administer Part A and Part B claims paid to hospitals and other 
institutions, such as home health agencies.[Footnote 6] Contractors 
called carriers would administer the majority of Part B claims for the 
services of physicians and other providers. By law, Medicare was 
required to choose its fiscal intermediaries from among organizations 
that were first selected by associations representing providers, a 
process called provider nomination. Medicare was also required to 
choose health insurers or similar companies to serve as its carriers 
and, by statute, did not have to award the contracts through 
competition. In addition, Medicare contracts were generally renewed 
each year. As a result, since the inception of the program, most 
Medicare claims administration contracts have been awarded and renewed 
on a noncompetitive basis, with limited exceptions.[Footnote 7] 
Contractors could not be terminated from the program unless they were 
first provided with an opportunity for a public hearing--a process not 
afforded under the FAR. Unlike other federal contractors, claims 
administration contractors could terminate their contracts. In 
addition, the contractors were paid on the basis of their allowable 
costs, generally without financial incentives to encourage superior 
performance.[Footnote 8]

The MMA required CMS to significantly change its contracting 
arrangements and follow the FAR, except to the extent inconsistent with 
a specific requirement of the MMA. The MMA removed the specific 
procedures for selecting fiscal intermediaries and carriers, and unlike 
CMS's existing contracts, MAC contracts must be fully and openly 
recompeted at least every 5 years. In addition, the new contracts will 
also contain performance incentives for contractors. Finally, MACs will 
not be permitted to default on their contracts or terminate their 
contracts as allowed under current contracting practices. Contract 
termination will follow the requirements of the FAR, which allow the 
government to terminate contracts for its convenience or for contractor 
default. 

MACs will assume work that is currently performed by 51 claims 
administration contractors. At present, there are 25 fiscal 
intermediaries and 18 carriers. In addition, four durable medical 
equipment (DME) regional carriers pay claims submitted by suppliers of 
DME, prosthetics, orthotics, and supplies, and four regional home 
health intermediaries process home health and hospice (HH) claims. 

CMS plans to select 23 MACs to serve specific jurisdictions, including 
15 A/B MACs, which will process both Part A and Part B claims; 4 DME 
MACs, which will process claims for DME, prosthetics, orthotics, and 
supplies; and 4 HH MACs, which will process claims for HH care. CMS's 
current schedule calls for the full fee-for-service contracting 
workload[Footnote 9] to be transferred to MACs by July 2009.[Footnote 
10] CMS plans to conduct competitions for existing Medicare contractor 
workloads beginning with a start-up acquisition and transition cycle 
for the 4 DME MACs and 1 A/B MAC. The start-up cycle will be followed 
by two additional acquisition and transition cycles. Appendix VI shows 
CMS's schedule and timing for competing all of the MAC contracts. 

MACs will be responsible for most of the functions currently performed 
by fiscal intermediaries and carriers. They will process and pay 
claims, handle first-level appeals of denied claims,[Footnote 11] and 
serve as providers' primary contact with Medicare. In addition, they 
will coordinate with CMS's functional Medicare contractors that perform 
limited Medicare functions on a national or regional basis, such as 
answering the 1-800-MEDICARE help line, coordinating Medicare and other 
insurance benefits, and conducting program safeguard activities. For 
example, the functional Program Safeguard Contractors (PSC) conduct 
activities to prevent or address improper payments--such as 
investigating potential fraudulent billing related to the claims paid 
by the claims administration contractors.[Footnote 12]

MACs' responsibilities for medical reviews of claims;[Footnote 13] 
benefit integrity, which involves the investigation of suspected 
fraud;[Footnote 14] and beneficiary inquiries will differ in some 
respects from those of the current claims administration contractors. 
Currently, three of the four DME regional carriers conduct their own 
medical reviews and benefit integrity activities for the claims they 
process.[Footnote 15] Under contracting reform, PSCs will be 
responsible for performing all medical reviews and benefit integrity 
activities related to the claims processed by the DME MACs. These 
responsibilities will be allocated differently for A/B MACs. All A/B 
MACs will conduct medical reviews of the Part A and Part B claims they 
will process, while PSCs will be responsible for conducting benefit 
integrity activities related to these claims.[Footnote 16] The current 
Medicare claims administration contractors respond to beneficiaries' 
questions that are specific to their claims, while staff from 1-800- 
MEDICARE answer general questions on the telephone help line. In the 
future, staff at beneficiary contact centers (BCC) will answer calls 
placed to 1-800-MEDICARE and assume the role of responding to general 
and claims-specific questions. MACs will be responsible for responding 
to more complex inquiries from beneficiaries that require a more 
advanced understanding of Medicare claims processing or coverage rules. 

CMS's Plan Does Not Provide an Appropriate Implementation Framework in 
All Critical Areas: 

CMS's plan for contracting reform provides detailed information--and an 
appropriate framework for implementation--in some, but not all, 
critical areas. For example, the plan presents detail on the proposed 
schedule for MAC implementation. Nevertheless, as figure 1 shows, the 
plan does not provide detailed information on the risks associated with 
contracting reform, some aspects of CMS's implementation approach, and 
the integration of reform activities with other initiatives. CMS has 
recently taken steps to address areas of the plan where details and 
complete information were lacking, as part of its ongoing planning 
efforts. However, key decisions relating to critical areas are yet to 
be made and incorporated into its plan. 

Figure 1: Areas of Detailed Information in CMS's Contracting Reform 
Plan: 

[See PDF for image]

[End of figure]

CMS's Plan Provides Useful Information about Some Aspects of 
Implementation: 

CMS's plan provides a clear discussion of the reasons for implementing 
contracting reform, including the restrictions and weaknesses in the 
current system, as shown in table 1. The plan also recognizes the 
benefits of improving Medicare contracting for beneficiaries and 
providers, such as providing a single point of contact for providers' 
claims-related inquiries. 

Table 1: CMS's Analysis of Restrictions or Weaknesses in Medicare 
Claims Administration Contracting and Their Associated Effects: 

Restriction or weakness in current system: Lack of full and open 
competition; 
Effects of current restriction or weakness: CMS lacks the flexibility 
to choose qualified organizations to process Medicare claims through 
full and open competition. Provider institutions, such as hospitals, 
nominate fiscal intermediaries to process Part A claims, which limits 
CMS's ability to manage the program effectively. The Secretary of HHS 
is required, by law, to choose Part B carriers from health insurers or 
similar companies and did not have to compete these contracts. 

Restriction or weakness in current system: Separate processing of Part 
A and Part B claims; 
Effects of current restriction or weakness: Part A and Part B claims 
are generally processed by separate claims administration contractors 
and claims processing systems. For example, a beneficiary with a 
hospital stay followed by home health care will have hospital and some 
home health claims paid by a fiscal intermediary, while other home 
health and physician claims will be paid by a carrier. This division of 
responsibilities for claims payment sometimes makes it difficult for 
beneficiaries and providers to have their questions answered quickly. 
Providers also face increased expenses due to separate processing and 
are limited in their ability to understand and coordinate services on 
behalf of their patients. 

Restriction or weakness in current system: Specialization restrictions; 
Effects of current restriction or weakness: CMS is limited in its 
ability to award separate contracts for individual claims 
administration activities in which certain companies may excel, such as 
operating data centers or educating providers about program rules. 

Restriction or weakness in current system: Absence of performance-based 
incentives; 
Effects of current restriction or weakness: Contractors work under cost-
based reimbursement contracts through which they are reimbursed for the 
necessary and proper costs of carrying out Medicare activities, but do 
not have financial incentives to improve their performance. 

Restriction or weakness in current system: Cumbersome termination 
procedures; 
Effects of current restriction or weakness: Contractors are allowed to 
terminate their contracts without cause, simply by providing 180 days 
notice. CMS, on the other hand, has to demonstrate that a poorly 
performing or unresponsive contractor has failed substantially to carry 
out its contract, or that continuation of the contract is 
disadvantageous or inconsistent with the effective administration of 
Medicare before it is able to terminate a contract. CMS is also 
required to provide the contractor an opportunity for a hearing before 
termination. 

Restriction or weakness in current system: Outdated information 
technology (IT); 
Effects of current restriction or weakness: Medicare's IT 
infrastructure is inadequate for the program's expanding needs and does 
not take advantage of current technologies (e.g., use of the Internet 
to submit and track claims) that would improve customer service and 
result in additional cost savings. 

Source: GAO analysis of CMS's Report to Congress. 

[End of table]

The plan also provides maps of the current jurisdictions of Medicare 
contractors and future jurisdictions of MACs. A CMS official told us 
that the agency took beneficiaries' patterns of care into account when 
drawing jurisdictional lines. In addition, according to the plan, CMS 
designed the new MAC jurisdictions, which were based on state 
boundaries, to achieve operational efficiencies, promote competition, 
and better balance the allocation of workloads. For example, there are 
one fiscal intermediary and three carriers currently serving New York, 
as well as two fiscal intermediaries and one carrier serving 
Connecticut. Under contracting reform, one A/B MAC will administer Part 
A and Part B claims for beneficiaries residing in these two states. 

Currently, different claims administration contractors handle Part A 
and Part B claims in the majority of states.[Footnote 17] For example, 
in Michigan, United Government Services processes Part A claims, and 
Wisconsin Physicians Service Insurance Company processes Part B claims. 
In addition, while some current contractors serve one state, others 
serve several--sometimes noncontiguous--states. For example, Blue Cross 
Blue Shield of Arizona processes Part A claims exclusively in Arizona, 
while National Heritage Insurance Company processes Part B claims on 
the East Coast in Maine, New Hampshire, Vermont, and Massachusetts and, 
on the West Coast, in California. The varying jurisdictions for 
contractors that process Part A and Part B claims have resulted in what 
CMS's plan terms "a patchwork of responsibility and service."[Footnote 
18] CMS has developed 15 distinct, nonoverlapping geographic 
jurisdictions for the A/B MACs.[Footnote 19] Appendixes VII, VIII, IX, 
X, XI, and XII show the jurisdictional maps for the current fiscal 
intermediaries, the current carriers, the current regional home health 
intermediaries, the current DME regional carriers, the 15 new A/B MACs, 
and the 4 new DME MACs and 4 new HH MACs. A CMS official stated that 
while the A/B MACs' jurisdictions continue to vary somewhat in size and 
workload, they are reasonably balanced in terms of the numbers of fee-
for-service beneficiaries and providers served.[Footnote 20] However, 
CMS officials have stated that companies might be able to win more than 
one MAC contract, and, if so, their workloads in multiple jurisdictions 
would potentially be greater than those of companies that win contracts 
for a single jurisdiction. 

In addition to providing information on MACs' jurisdictions, CMS's plan 
provides timelines for implementing MAC contracting, including 
anticipated contract award dates for the start-up cycle and two 
subsequent cycles. CMS plans to monitor each cycle, including 
transitions, and to adjust the implementation schedule if necessary. 
The start-up cycle, which will result in the award of four contracts to 
DME MACs and one contract to an A/B MAC, should provide CMS with 
experience that can be applied to the next two cycles. For example, the 
start-up cycle will allow new CMS personnel to obtain additional 
expertise, if needed, on contracting activities. It will also allow CMS 
to examine its acquisition and transition efforts and apply lessons 
learned to future cycles. 

Recognizing that open communication with stakeholders is important to 
the successful implementation of contracting reform, CMS's plan 
incorporates a written strategy to provide information and solicit 
questions, comments, and feedback on Medicare contracting reform from 
potential MACs, providers, and beneficiaries. This communication 
strategy includes periodically holding open meetings and establishing a 
Medicare contracting reform Web site.[Footnote 21] For example, CMS 
hosted a series of open meetings in 2004 and 2005 to share information 
and seek input on aspects of its contracting reform plan, including MAC 
jurisdictions, draft statements of work,[Footnote 22] and proposed 
performance standards.[Footnote 23] In addition, CMS's Web site is 
routinely updated to provide answers to questions about contracting 
reform and provide access to important documents, such as its Report to 
Congress. The Web site also provides a link to a federal procurement 
Web site,[Footnote 24] where draft and final versions of MAC statements 
of work can be found. Interested parties, including organizations 
interested in competing for MAC contracts, provided feedback on these 
drafts through CMS's open meetings and its Web site. In developing 
certain areas of the contracting reform plan, CMS also sought input 
from its headquarters and regional office staff. For example, CMS teams 
worked collaboratively to develop the draft statements of work for A/B 
MACs and DME MACs. 

CMS's Contracting Reform Plan Does Not Fully Address Three Critical 
Implementation Areas: 

While CMS's contracting reform plan provides detailed information in 
some areas, it does not comprehensively address (1) contracting reform 
risks and how the agency plans to mitigate them; (2) the intended 
approach for implementing certain aspects of MAC contracting, including 
details on how CMS will monitor MACs' performance; and (3) coordination 
of contracting reform activities with other complex initiatives that 
CMS is implementing. While a comprehensive contracting reform plan was 
due in October 2004, we found that the plan was still incomplete as of 
June 2005. The agency has begun to develop, but has not completed, a 
more detailed plan in critical implementation areas. Nevertheless, 
without having all of the critical elements of its plan in place, the 
agency is undertaking an accelerated schedule and intends to transfer 
all claims processing work to MACs by July 2009, more than 2 years 
ahead of the MMA's time frame. 

Plan Does Not Fully Address Implementation Risks: 

CMS's plan does not comprehensively address three major risks and 
indicate the steps that the agency plans to take to mitigate them. 
These are CMS's proposed implementation schedule, the volume and 
complexity of anticipated claims processing workload transitions, and 
the potential for voluntary contractor withdrawals. Each of these risks 
has the potential to disrupt claims administration services, resulting 
in delayed or improper payments to providers. 

The Report to Congress--one of the documents in CMS's contracting 
reform plan--briefly noted that the anticipated implementation schedule 
"will require substantial risk management and schedule precision to 
minimize possible operational disruption."[Footnote 25] CMS's proposed 
implementation schedule calls for all work to be transferred to MACs by 
July 2009--more than 2 years ahead of the MMA's time frame. The initial 
start-up acquisition cycle[Footnote 26] is taking place in a 27-month 
period--from April 2005 to July 2007--during which about 9 percent of 
the national claims possessing workload will be transferred to MACs. If 
CMS chooses current contractors that are administering claims in the 
MAC jurisdictions, the percentage of the workload transferred would be 
less. In the first phase of the start-up cycle, CMS will select and 
transfer workload to 4 DME MACs. In the second phase, CMS will select 
and transfer workload to 1 A/B MAC. Following the initial start-up 
cycle, CMS is planning two acquisition cycles, which will last from 
September 2006 to July 2009, during which it will select and transfer 
the remaining current contractors' work to 14 A/B MACs and 4 HH MACs. 
As part of these two cycles, in the 22 months from September 2007 to 
July 2009, CMS plans to manage transitions of as much as 91 percent of 
the annual Medicare claims processing workload, which represent an 
estimated $250 billion in payments to providers.[Footnote 27] The 
transition period for cycle one is 1 year, from September 2007 to 
September 2008, and the transition period for cycle two is 10 months, 
from September 2008 to July 2009. In 13 of the past 15 years, CMS has 
transferred at least one contractor's workload. These transitions took 
an average of 6 to 9 months, with some lasting as long as a year. 

CMS decided on a more compressed schedule after initially considering a 
longer implementation period. In November 2004, CMS officials told us 
that they were planning to move to MAC contracting using six 
acquisition cycles to be completed around April 2011. According to the 
Report to Congress, CMS officials believed that the potential savings 
from contracting reform suggested that transferring larger portions of 
the workload to MACs in a shorter time frame would allow savings to 
accrue more quickly to the Medicare program. 

Despite the ambitious time frame for implementation, CMS's plan does 
not provide detailed information on the risks involved in transferring 
large segments of Medicare's claims processing workload on an 
accelerated schedule or outline contingency plans for the transitions 
to MACs. CMS's accelerated schedule for cycles one and two leaves 
little time for CMS to examine its acquisition and transition efforts, 
apply lessons learned, and resolve disagreements about the agency's 
award process with companies that were not selected. Furthermore, due 
to the accelerated cycle, interested companies--some of which may be 
among the best qualified to perform as MACs--may decide not to compete 
to win multiple MAC contracts because developing concurrent proposals 
or assuming the workload for more than one jurisdiction simultaneously 
might strain their resources. In addition, it may prove difficult for 
CMS staff to evaluate proposals, award contracts, and manage concurrent 
transitions within the proposed time frame. 

CMS's plan does not provide details on its strategy for managing these 
compressed transitions with its anticipated staff resources. CMS 
officials expressed concerns to us that many of the staff most 
experienced in handling transitions were, or were close to being, 
eligible to retire and that CMS might have to manage these transitions 
with less experienced staff. In addition, CMS staff have never had to 
manage as many simultaneous transitions, which is likely to add to the 
challenge of managing them so that they are as smooth as possible for 
providers. As we reported previously, the lack of sufficient staff 
resources has hampered other transitions.[Footnote 28]

The volume and complexity of claims workload transitions is a second 
risk that CMS's plan does not adequately address. Although CMS has 
regularly managed the transitions of claims administration contractors' 
workloads and functions and has much experience in doing so, recent 
transitions have affected only about 10 percent of the claims for Part 
A and Part B in any year. Nevertheless, CMS is planning to transfer 91 
percent of current contractors' workload to MACs in less than 2 years. 
Furthermore, the MAC transitions will be more complex than past 
contractor transitions because both Part A and Part B workloads will be 
transferred from multiple contractors to a single MAC in a new 
jurisdiction. These changes mean, for example, that under the initial 
A/B MAC contract that is awarded--one that involves less than 3 percent 
of the national workload in a six-state jurisdiction--CMS will 
simultaneously transfer as many as nine separate segments of current 
contractors' workload to the new MAC.[Footnote 29] Figure 2 illustrates 
the transitions that will occur to consolidate the Part A and Part B 
workload in the first contract to be awarded for an A/B MAC 
jurisdiction. These transitions will also involve transferring some 
portions of the work currently being done by the carriers and fiscal 
intermediaries to functional contractors. For example, CMS will be 
transferring medical review and benefit integrity work from DME 
regional carriers to PSCs at the same time that the claims workload 
transfers to DME MACs. While the start-up cycle transitions are 
complex, they are planned to affect only 1 A/B MAC and the 4 DME MACs. 
CMS will be conducting a much greater number of transitions for cycles 
one and two, as the rest of claims administration work is transferred 
from current contractors to 14 A/B MACs and 4 HH MACs. 

Figure 2: Part A and Part B Transitions That Will Occur in One MAC 
Jurisdiction: 

[See PDF for image]

[End of figure]

Additional factors may add to the complexity of the transitions. For 
example, if current fiscal intermediaries and carriers choose not to 
compete or lose competitions for MAC contracts in the jurisdictions 
where they currently process claims, they may have little incentive to 
be highly cooperative in the transition activities. In these cases, 
their knowledgeable staff who would facilitate transitions may seek 
employment elsewhere. Further, MAC transitions may involve the transfer 
of workloads to companies new to Medicare operations, which would add 
complexity to the process. 

Another risk that CMS's plan has not fully addressed is the potential 
impact that voluntary contractor withdrawals may have on the planned 
transition schedule. CMS has not developed mitigation strategies to 
deal with these potential withdrawals. Several CMS officials told us 
that they were concerned that some contractors might voluntarily 
withdraw before the agency's planned competition for jurisdictions that 
included their current service areas because the contractors did not 
intend to compete as MACs. In addition, contractors that lose 
competitions may opt to leave the Medicare program before transitions 
to new MACs have been completed. CMS has the option of paying 
contractors' staff retention bonuses, so that key contractor staff can 
work through transitions, but that may not be enough to convince 
contractors to stay in the program. Voluntary withdrawals could force 
CMS to conduct competitions and manage transitions for the affected 
jurisdictions on a different or more accelerated schedule than 
originally planned. CMS could elect to choose a Medicare claims 
administration contractor to briefly perform the withdrawing 
contractor's work until a MAC is chosen for the affected jurisdiction, 
but this could be perceived as limiting competition by favoring one 
company over others. 

The ultimate risk from transitions that do not proceed smoothly or on 
schedule is that providers might not receive payment for the items or 
services they furnished to beneficiaries or could be paid 
inappropriately. Interrupting providers' cash flow by failing to pay 
them can create significant problems in their operations. On the other 
hand, any increase in improper payments would create a further drain on 
the Medicare trust funds. In fiscal year 2004, CMS estimated that 
Medicare claims administration contractors' net improper payments 
amounted to $19.9 billion. 

CMS has not completed a comprehensive risk mitigation plan to address 
the risks associated with contracting reform, but the agency has taken 
some initial steps to manage the risks. CMS has developed a procedure 
for identifying, analyzing, responding to, and monitoring and 
controlling risks. As part of this procedure, CMS has identified 
certain risks that may have an impact on implementation, including the 
availability of resources to complete scheduled procurement tasks and 
the difficulty of developing a clear, complete statement of work that 
minimizes the need for future contract modifications. The agency is 
currently working on developing a document that lists proposed actions 
that could mitigate these and other identified risks. However, CMS's 
descriptions of proposed mitigation actions lack specificity. For 
example, to address the risk that CMS may not have the funding to 
conduct transition activities as scheduled, the proposed mitigation 
action is to "monitor federal appropriations," but the document does 
not indicate how the agency might redeploy resources or restructure its 
transitions, should a funding gap occur. Further, CMS has not developed 
mitigation actions for some serious risks, including the failure to 
create internal processes for managing MACs. Without such internal 
processes, CMS may not be able to effectively administer MAC contracts. 

Plan Lacks Detailed Information on MAC Contracting Strategy and 
Management and Oversight Approach: 

Although CMS has done extensive work toward developing a strategy that 
outlines how it intends to implement MAC contracting, the agency's plan 
lacks important implementation information in some areas. For example, 
CMS has made final decisions concerning certain elements of the MAC 
contracting strategy, such as paying performance incentives to 
encourage contractor innovation, efficiency, and cost effectiveness. 
However, for A/B MACs, the plan does not provide complete and 
definitive information on the contract type, performance measures and 
incentive structure, proposal evaluation criteria, and methods for 
maintaining a competitive environment and conducting market research to 
gather information on the number and size of companies that may submit 
proposals. CMS's MAC acquisition strategy, which will provide 
information on these areas, is not yet complete. The agency planned to 
finalize this strategy in July 2005 and to issue the A/B MAC request 
for proposals in September 2005.[Footnote 30] Knowing such critical 
contracting information well in advance of the issuance of the request 
for proposals would make it easier for interested parties to develop 
specific plans for competing to win A/B MAC contracts. Having a robust 
pool of potential contractors with good proposals would make it easier 
for CMS to choose applicants likely to be effective as MACs. 

CMS's contracting reform plan states that some MAC functions will be 
integrated with those of other types of Medicare contractors, but the 
agency has not fully developed the details of this integration. For 
example, the plan states that CMS expects that PSCs will continue to 
perform activities such as medical reviews and fraud investigations in 
the future and will coordinate closely with MACs. In addition, the 
statements of work for DME MACs and A/B MACs require that they sign 
agreements with PSCs to define respective roles and responsibilities. 
Among their responsibilities, DME MACs and A/B MACs will be expected to 
coordinate with PSCs in referring potential fraud cases when, for 
example, MACs identify claim forms that have been altered to obtain a 
higher payment or when it appears that a supplier or provider may have 
attempted to obtain duplicate payments. MACs' coordination with PSCs is 
critical because findings of fraud could affect payments to providers. 
Coordination with PSCs is also discussed in "concept of operations" 
documents for DME MACs and A/B MACs. These documents provide high-level 
information on how MACs will be expected to work with PSCs and other 
contractors that focus on particular Medicare program functions, such 
as claims appeals. However, CMS has yet to develop many details, 
including information on the specific steps that will be used to 
facilitate contractor coordination. 

In addition, CMS's plan does not fully outline how the agency intends 
to evaluate and manage MACs. CMS's plan incorporates a strategy paper 
on evaluating MACs' performance, which was developed for the agency by 
a support services contractor. The strategy paper makes a number of 
recommendations, including establishing a specific office within CMS to 
gather, validate, and score contractor performance data and to share 
this information with agency management. CMS officials are currently 
considering these and other recommendations that were contained in the 
strategy paper. However, as of June 2005, they had not decided whether 
to implement any of these recommendations and had not completed their 
design of an approach for overseeing and evaluating MAC performance. 
Contractor oversight is an area of considerable concern, because, in 
the past, CMS's failure to monitor Medicare claims administration 
contractors left the Medicare program vulnerable to fraud, waste, and 
abuse.[Footnote 31] For example, CMS did not always detect activities, 
such as the falsification of reports on contractor performance and the 
improper screening, processing, and paying of claims, that led to 
additional costs to the Medicare program. 

In developing the MAC oversight strategy paper, CMS's contractor drew 
on the work of a cross-component work group within CMS that was 
established in April 2003.[Footnote 32] The work group reported in June 
2004 that CMS lacked an integrated and coordinated framework to guide a 
wide range of evaluation activities and that the agency had difficulty 
in compiling a comprehensive view of individual contractor 
performance.[Footnote 33] The work group also noted that complete and 
accurate information on contractor performance will be imperative as 
contracts for MACs are periodically recompeted and determinations about 
their records of performance become part of the qualification criteria. 
This information could also be critical in determining the amounts CMS 
pays to MACs as performance incentives. 

The plan also lacks detailed information on organizational changes to 
better realign agency personnel to support the management and oversight 
of new MAC contracts because CMS has not made final decisions in this 
area. While CMS currently administers some types of contracts that are 
governed by the FAR,[Footnote 34] MAC contracts generally will be 
larger, more complex, and more challenging to administer. CMS's past 
oversight of claims administration contractors was hindered by 
organizational weaknesses,[Footnote 35] and at present, multiple 
central office components and regional offices have responsibilities to 
help oversee and manage claims administration contractors.[Footnote 36] 
Having an organizational structure that is appropriately aligned for 
CMS to manage and oversee MACs will make it easier for the agency to 
routinely evaluate its contractors on the basis of a variety of newly 
established performance measures. CMS has reorganized the central 
office component that will be responsible for awarding MAC contracts 
and has been considering ways to use regional offices' staff expertise 
to support MAC contracting efforts. However, CMS has not completed its 
plan for organizational changes, including the division of labor and 
responsibilities for management and oversight of Medicare contractors 
among CMS components and between the central and regional offices. 

Plan Does Not Fully Integrate Scheduling of Contracting Reform 
Activities with Other Initiatives: 

CMS has not developed an approach that fully integrates the planning 
and scheduling of Medicare contracting reform with other initiatives 
that will affect Medicare contractors, beneficiaries, and providers 
over the next several years. As CMS works toward implementing 
contracting reform, it is also focusing on several critical initiatives 
that must be integrated, or implemented concurrently, with Medicare 
contracting reform. These include the Medicare prescription drug 
benefit and the expansion of the existing options available to Medicare 
beneficiaries who enroll in private health plans. According to CMS 
officials, these initiatives may compete with contracting reform for 
agency resources. Other key planned initiatives, such as major systems 
upgrades or replacement, will directly affect Medicare claims 
administration operations and are anticipated to be fully or partially 
implemented between now and 2009 in conjunction with contracting 
reform. Information on these interrelated initiatives is provided in 
table 2. As we have previously reported, planning for IT system 
transitions has often been problematic in federal agencies.[Footnote 
37] Coordinating the schedule for implementing these initiatives in 
conjunction with Medicare contracting reform is crucial to ensuring 
that claims administration operates smoothly during the transition to 
MACs. 

Table 2: Key Initiatives Affecting MAC Implementation: 

Initiative: Standard front end; 
Description: This initiative will standardize the way that electronic 
claims enter the automated processing system; 
Implementation schedule and integration issues related to MAC 
implementation: Implementation of this initiative will occur within the 
DME MACs and the A/B MACs at the same time they are implemented. 
Changing claims administration contractors can require providers and 
billing agents to adapt to a new front end, which is why standardizing 
the front end as part of MAC implementation could minimize future 
disruption for providers and billers. 

Initiative: Data center consolidation; 
Description: CMS plans to consolidate its current 14 operational data 
centers that conduct claims processing functions into 2 data centers; 
Implementation schedule and integration issues related to MAC 
implementation: CMS had initially planned to begin consolidating the 
data centers in fiscal year 2006 to overlap with MAC implementation, 
but in May 2005, the agency postponed the initiative for about 2 
months, due to the extent of public comments received on the draft 
request for proposals for data center contracts. Future consolidation 
of data centers will affect MACs because they are required to work with 
their respective data centers to maintain electronic information. As a 
result, delays or difficulties in transferring workload to the chosen 
data centers could increase the risks of claims payment problems during 
MAC transitions. 

Initiative: BCCs; 
Description: CMS plans to establish two to three BCC contracts, which 
will be responsible for handling beneficiaries' telephone and written 
inquiries; 
Implementation schedule and integration issues related to MAC 
implementation: BCC implementation overlaps with MAC implementation. 
CMS plans to award the first BCC contract in the summer of 2006 and 
transfer the workload in the summer of 2007. The second BCC contract 
will be awarded in fall 2007, and the workload will be transferred in 
2008. While BCCs will assist beneficiaries by answering claims-related 
inquires, they will need to coordinate with MACs because MACs will be 
responsible for answering more complex questions. 

Initiative: Healthcare Integrated General Ledger Accounting System 
(HIGLAS); 
Description: HIGLAS is a major CMS initiative to modernize Medicare's 
accounting and financial management systems. CMS's current accounting 
systems are fragmented and overlapping and will be replaced with 
HIGLAS--a single, integrated financial accounting system; 
Implementation schedule and integration issues related to MAC 
implementation: HIGLAS implementation overlaps with MAC implementation. 
HIGLAS is expected to be fully operational in 2007. In the future, all 
MACs will be required to use HIGLAS. However, several current 
contractors have begun to use HIGLAS, and other fiscal intermediaries 
and carriers will have begun to use HIGLAS before MAC competitions get 
under way. For jurisdictions where transitions to HIGLAS are not 
complete, CMS will need to coordinate its scheduling of MAC and HIGLAS 
implementation because CMS wants all MACs to use HIGLAS as their 
financial accounting system. 

Initiative: PSCs; 
Description: PSCs focus on program safeguard activities, such as the 
review of provider activities, including medical, utilization, and 
fraud reviews; cost report audits; Medicare secondary payer 
determinations; and provider and beneficiary education; 
Implementation schedule and integration issues related to MAC 
implementation: PSC transitions overlap with MAC implementation. The 
medical review and benefit integrity work will transfer from three DME 
regions to PSCs simultaneously with the transition to DME MACs. The 
work conducted under three PSC medical review contracts for A/B claims 
will transfer to the A/B MACs in the affected jurisdictions at the same 
time that the A/B MACs assume their other contractual responsibilities. 

Initiative: Recovery Audit Contractor initiative; 
Description: This initiative is a demonstration initiative required by 
the MMA. It includes two Medicare secondary payer recovery audit 
contractors and three claims review recovery audit contractors; 
Implementation schedule and integration issues related to MAC 
implementation: The implementation of this initiative overlaps with MAC 
implementation. This demonstration will run through mid-2008 and will 
affect California, New York, and Florida. MACs will not perform any 
postpay medical reviews for prior fiscal years for claims paid to 
providers in these states, but must coordinate with the contractors 
tasked with this assignment. MACs processing claims for these three 
states must also complete some additional administrative work related 
to debt collection. 

Source: GAO analysis of CMS documents. 

[End of table]

HIGLAS, in particular, provides an example of why effective integration 
is essential. Most outgoing contractors will not be utilizing HIGLAS at 
the time their workloads are transferred to MACs. Therefore, CMS will 
have to coordinate HIGLAS transition activities, including data 
preparation and data conversion testing, between the MACs that will be 
using HIGLAS and the outgoing contractors that have been using the 
existing financial management systems. Given that the HIGLAS 
implementation strategy calls for "just in time" data conversion to 
HIGLAS format by outgoing contractors at the time the work is 
transferred to the MACs, problems or delays in this conversion could 
delay MAC transitions. Therefore, the scheduling for HIGLAS will have 
to be carefully managed to allow sufficient time for the data 
conversion. 

Although CMS has begun initial efforts to integrate the planning and 
scheduling of several major initiatives that will affect contractors, 
an agency official told us that there are no planning documents to 
provide a detailed integration framework and that he did not know when 
such documents would be available.[Footnote 38] He said that CMS is 
attempting to determine the appropriate sequencing and 
interdependencies of the multiple initiatives occurring in the agency. 
To focus its sequencing efforts, CMS has designated the contracting 
reform implementation schedule as the anchor around which it will 
schedule the implementation of HIGLAS and other critical initiatives. 
For example, since CMS plans call for MACs moving to HIGLAS either 
before or with MAC claims workload transitions, the MAC implementation 
plan will be pivotal in determining when the HIGLAS transitions will be 
accomplished. CMS is also examining each project's resource 
requirements to help ensure that the agency is able to fund the 
initiatives in the sequence planned. 

Delays in the implementation of MAC-related initiatives could 
potentially have a significant impact on the timing, scope of work, 
costs, and ultimate success of MAC implementation. For example, CMS has 
already begun to experience schedule slippage for its initiative to 
consolidate the contractors' data centers. These data centers, which 
are provided by current carriers and fiscal intermediaries, conduct the 
physical processing of Medicare claims and as a result, play a crucial 
role in efficient and accurate claims administration. The agency had 
intended to award contracts for four data centers that would 
consolidate the work of 14 current centers before awarding the DME MAC 
contracts, which are anticipated to be awarded in December 2005. 
However, it suspended the request for proposals on May 3, 2005, because 
it was unable to consider the large number of comments that were 
received on its draft request. It reissued its solicitation on June 27, 
2005, for two, instead of four, data centers. Delays or other problems 
in implementing the consolidation of its data centers could affect the 
efficiency and effectiveness of MACs' claims processing transitions. 
CMS's Report to Congress stated that having the new data centers would 
be critical to achieving the greatest efficiency from the MAC 
transitions, in part because some of the information services and 
support to be provided by MACs would depend on the modernized 
platform.[Footnote 39] Currently, CMS expects that one of the new DME 
MACs will be managing a data center for all of the DME MACs as a 
stopgap measure and plans to award the contract for the two data 
centers in February 2006. Implementation of the data centers is planned 
to coincide with implementation of the first A/B MAC selected. 

The data center consolidation effort faces some of the same 
complexities that might occur during the transition of the claims 
processing contracts. If claims administration contractors operating 
data centers opt to leave the program before the conclusion of their 
contracts, CMS will have to find other data center contractors to 
temporarily take over that workload. Furthermore, because the data 
center consolidation is planned to occur during the MAC transition 
period, the two data center contractors will have to support claims 
administration contractors moving in or out of the program, while also 
integrating some of the prior data center contract work into their new 
data center responsibilities. CMS generally envisioned multiple data 
center transitions overlapping, but the schedule for data center 
consolidation is uncertain. CMS has not indicated how it intends to 
handle the risks associated with moving data center work at the same 
time claims processing workload is being transferred to MACs. 

Plan's Cost and Savings Estimates Do Not Provide a Reasonable Basis for 
Decision Making: 

CMS's plan includes estimated costs and savings for Medicare as a 
result of contracting reform, but the estimates are too uncertain to 
provide a reasonable basis for making implementation decisions. Because 
CMS has never undertaken an effort comparable to full-scale contracting 
reform, the plan's cost and savings projections were based on 
questionable evidence and assumptions about a contracting environment 
that differs considerably from its current one. As a result, the costs 
to implement contracting reform and the savings generated from it could 
be significantly greater or less than CMS has anticipated. 

Cost Estimates Depend on Uncertain Outcomes: 

In its plan, CMS estimated that the costs to implement contracting 
reform from 2006 to 2011 would total about $666 million.[Footnote 40] 
The plan's cost estimate is higher than indicated in the Report to 
Congress, which included only the fiscal year 2006 budget request of 
$58.8 million to support a single year of contracting reform 
implementation costs. CMS opted not to include its estimates for funds 
that would likely be requested in its budgets for fiscal years 2007 
through 2011. The Report to Congress indicated that contracting reform 
would require "substantial additional investment in subsequent 
years."[Footnote 41] The costs CMS anticipates incurring each year are 
shown in figure 3. 

Figure 3: Estimated Costs of Medicare Contracting Reform, Fiscal Years 
2006-2011, as of February 2005: 

[See PDF for image]

Note: The costs for each year are adjusted for inflation, using 2004 as 
the base year. 

[End of figure]

The estimated $666 million in costs is divided into four categories, as 
noted in table 3.[Footnote 42] The largest cost component is for the 
termination and transition of the current Medicare contractors, which 
CMS has estimated at $331.5 million. When a Medicare contract is 
terminated, contractors can have costs for items such as lease 
termination, equipment depreciation, and severance pay for contractors' 
employees. The current Medicare contracts may require CMS to pay many 
of these termination costs when contractors leave the Medicare program. 
Similarly, when a Medicare contract workload is transferred from an 
outgoing contractor to another one, transition costs are incurred. Such 
transition costs include expenses related to transferring Medicare 
records and updating records related to Medicare benefit payments, 
including overpayments and other accounts receivable, so they are ready 
for the incoming contractor to use. 

Table 3: CMS's Estimates of Administrative Costs for Medicare 
Contracting Reform, Fiscal Years 2006-2011, as of February 2005: 

Dollars in millions: 

Type of cost: Termination and transition costs; 
Estimated cost: $331.5. 

Type of cost: Performance incentives; 
Estimated cost: $190.6. 

Type of cost: IT and other costs[A]; 
Estimated cost: $132.5. 

Type of cost: Provider satisfaction surveys; 
Estimated cost: $11.7. 

Type of cost: Total; 
Estimated cost: $666.3. 

Source: GAO analysis of CMS cost estimates. 

[A] CMS informed us on July 29, 2005, that it had updated this cost 
estimate, but the updated estimate was not available to be included in 
this report. 

[End of table]

Although CMS's estimate for termination and transition costs is based 
on cost data from prior years, it is impossible to predict with 
certainty the termination or transition costs that will be incurred 
through implementing contracting reform. CMS's estimate for termination 
and transition costs is based on the agency's experience with both 
types of costs from 1995 to 2001. The estimate assumes that current 
contractors will win the majority of the MAC contracts and retain about 
60 percent of their current workload. However, CMS officials do not 
know how many of the existing contractors will win MAC contracts for 
particular jurisdictions, so this assumption is speculative. 
Additionally, some of CMS's prior contractor transitions were "turnkey" 
operations, in which an incoming contractor simply assumed the prior 
contractor's business arrangement and staff without needing to incur 
some of the usual start-up costs, such as equipment purchases. 
Likewise, in turnkey transitions, CMS did not have to cover severance 
pay, because the outgoing contractor's existing staff could be employed 
by the incoming contractor. As a result, the prior transitions may have 
cost less than the transitions that will occur during contracting 
reform because CMS is not requiring MACs to retain outgoing 
contractors' work sites or staff. 

Contracting reform will allow CMS to pay performance incentives that 
are designed to reward MACs with exceptional performance. However, it 
is impossible to know the amount of incentive fees contractors will 
earn in the full-scale MAC environment until the contracts are awarded 
and CMS has more experience with contractor performance. These 
performance incentives are projected to cost 5.5 percent of the total 
estimated costs of the MAC contracts, or $190.6 million for fiscal 
years 2006 through 2011. CMS based this estimate on its prior 
experience in managing contractor incentive programs on a much smaller 
scale. 

Several IT modernization projects designed to support MACs by 
facilitating electronic claims processing are included in CMS's 
estimate of contracting reform costs.[Footnote 43] These IT project 
costs include CMS's planned consolidation of its current data centers. 
However, delays in the data consolidation initiative may affect the 
amount of these costs.[Footnote 44] The IT modernization costs also 
include plans to standardize the front end, or the way that electronic 
claims enter the DME MACs' automated processing systems. CMS did not 
include similar costs for A/B MACs, because the agency had not made a 
decision to standardize the A/B MAC front ends at the time these 
estimates were made.[Footnote 45] CMS's $132.5 million estimate for IT 
and other costs included $78.7 million in IT costs needed to support 
Medicare contracting reform, primarily the cost of data center 
consolidations.[Footnote 46]

The final type of costs CMS estimated was for surveys of providers to 
assess their opinions about MAC performance. The MMA required that MAC 
performance be assessed in part based on provider satisfaction. CMS 
plans to begin surveying providers to measure their satisfaction with 
their MAC's performance after MACs begin operating. The cost estimate 
for these surveys is $11.7 million and was based on an internal CMS 
analysis. 

A potential operational cost not part of CMS's implementation estimate 
is funding for MAC contract modifications. Under the current contract 
arrangements, CMS is able to develop new tasks for contractors to 
complete. The agency may pay more for these tasks to be completed, 
regardless of the initial requirements set for the year, or may direct 
the contractor to do the work within its existing budget, if CMS's 
review of the contractor's spending pattern indicates that new funding 
is not needed to complete the new tasks. In the MAC environment, unless 
they become part of the statement of work, CMS will not be able to add 
new tasks to the MAC contracts without negotiating payment for them. 
Because contractors will submit proposals based on the tasks described 
in the original statement of work, work required after the contract is 
awarded could require CMS to negotiate with MACs. This could be the 
case, for example, if new legislation requires CMS to implement a major 
program change that was not anticipated in the established MAC contract 
costs. For example, in 2001, we reported that the Department of Defense 
(DOD) was not including contract adjustments when budgeting for its 
contracts with the insurers delivering health care to DOD 
employees.[Footnote 47] We warned that this approach could become quite 
costly, because in fiscal year 2001, it led to a $500 million shortfall 
in the DOD budget. When an agency is negotiating changes with an 
existing contractor, the competitive aspect of the negotiations is 
lost. As a result, the federal government may not always receive the 
best price. If CMS has to negotiate new tasks with the MACs for greater 
payment, contracting costs could rise above the agency's estimates. To 
address this concern, CMS has instructed companies interested in 
becoming DME MACs to assume a level of effort for a specific number of 
changes. As long as the extra work to implement program changes does 
not exceed the level of effort in the statement of work, the Medicare 
program would not incur additional operational expenses. 

Savings Estimates Depend on Contractor Performance in Reducing Improper 
Payments: 

Based on estimates generated both internally and by a consultant, CMS 
expects that contracting reform will generate significant savings to 
Medicare's administrative budget and to the Medicare trust funds. While 
it is rational to assume some level of savings, these estimates are 
highly uncertain because they project the outcome of contracting 
processes and protocols that CMS has not used before. Furthermore, the 
consultant's estimates relied on questionable evidence and were not 
reviewed by CMS program staff with the expertise to confirm whether the 
assumptions upon which they are based are realistic. 

CMS's estimate of savings from 2006 to 2011 for the administrative 
budget totals $459.5 million, as shown in table 4. These savings are 
estimated to come from two sources. First, CMS anticipates that the 
competed MAC contracts will cost less than the current agreements and 
encourage more innovative efforts among contractors, which will allow 
them to operate at lower cost. CMS estimates that the introduction of 
competition will lower the contractor budget for awarded MAC contracts 
by 6 percent in the first year and 12 percent in each succeeding year. 
Second, CMS anticipates that the consolidation of its 14 Medicare data 
centers will lower operating costs.[Footnote 48] Both of the savings 
estimates shown in table 4 will be highly dependent upon contractor 
performance and the outcome of the competitive process. For instance, 
any savings CMS incurs from competing the MAC contracts will 
substantially depend on their final costs. 

Table 4: CMS's Estimates of Administrative Savings from Medicare 
Contracting Reform, Fiscal Years 2006-2011, as of February 2005: 

Dollars in millions: 

Source of savings: Competition for MAC contracts; 
Estimated savings: $376.3. 

Source of savings: Consolidation of Medicare data centers[A]; 
Estimated savings: $83.2. 

Source of savings: Total; 
Estimated savings: $459.5. 

Source: GAO analysis of CMS savings estimates. 

[A] CMS informed us on July 29, 2005, that it had updated this savings 
estimate and it is now higher, but the updated estimate was not 
available to be included in this report. 

[End of table]

CMS's annual estimates of savings for the administrative budget 
increase significantly from fiscal year 2006 to fiscal year 2011. As 
shown in figure 4, these estimated savings would begin to outpace CMS's 
estimated administrative costs in 2009, and by 2011, they would exceed 
estimated costs by $100 million. 

Figure 4: CMS's Annual Estimates of Administrative Costs and Savings 
from Medicare Contracting Reform, Fiscal Years 2006-2011, as of 
February 2005: 

[See PDF for image]

[End of figure]

CMS anticipates that the bulk of the savings from Medicare contracting 
reform will occur through funds it can avoid spending from the Medicare 
trust funds, but the basis for this estimate is uncertain. CMS's 
consultant estimated the total projected savings to the trust funds 
through fiscal year 2011 to be over $1.4 billion.[Footnote 49] The 
savings to the trust funds are expected to come from the three main 
sources shown in table 5. The consultant who created these savings 
estimates explained that while it is logical to assume some level of 
savings to the Medicare program, there are "enormous uncertainties" at 
this stage of the implementation process, which make it difficult to 
project the savings with much accuracy. Ultimately, each of these 
sources of savings assumes that contracting reform will lead to a lower 
rate of improperly paid claims. Further, while the estimate for each of 
the three sources is based on a different methodology and formula, the 
basis for each is similar enough that the savings accrued through each 
may overlap, resulting in possible double counting. Therefore, whether 
contracting reform will actually achieve the $1.4 billion savings is 
highly uncertain. 

Table 5: CMS's Consultant's Estimates of Savings to the Trust Funds 
from Medicare Contracting Reform, Fiscal Years 2006-2011: 

Dollars in millions. 

Source of savings: Combining Medicare contracts for Part A and Part B, 
resulting in more comprehensive medical reviews of claims; 
Fiscal year 2006-2010 estimated savings: $350; 
Fiscal year 2011 estimated savings: $220; 
Total fiscal years 2006-2011 estimated savings: $570. 

Source of savings: Higher claims denial rates, because MACs will 
perform more effective medical reviews, to remain competitive[A]; 
Fiscal year 2006-2010 estimated savings: $160; 
Fiscal year 2011 estimated savings: $100; 
Total fiscal years 2006-2011 estimated savings: $260. 

Source of savings: Greater incentive for MACs to operate efficiently 
and adopt industry innovations in automated review of claims to remain 
competitive; 
Fiscal year 2006-2010 estimated savings: $390; 
Fiscal year 2011 estimated savings: $260; 
Total fiscal years 2006-2011 estimated savings: $650. 

Total estimated savings; 
Fiscal year 2006-2010 estimated savings: $900; 
Fiscal year 2011 estimated savings: $580; 
Total fiscal years 2006-2011 estimated savings: $1,480. 

Source: GAO analysis of CMS's consultant's savings estimates. 

Note: The Report to Congress stated savings for 2006 through 2010, but 
the consultant's complete estimates were calculated through 2011. 

[A] The consultant assumed that a portion of claims denial rates can be 
associated with contractor performance and that contractors would have 
an incentive for higher performance in the new competitive contracting 
environment. As a result, the savings estimate includes projected 
savings from higher claims denial rates. 

[End of table]

The consultant's estimate anticipates that MACs could detect a larger 
amount of improper payments because they will be examining both Part A 
and Part B claims, but there is little evidence to support the amount 
of savings assumed. Currently, Part A and Part B medical reviews are 
generally conducted by different contractors, which lessens their focus 
on problematic billing that spans both parts. The consultant estimated 
that having MACs conduct joint Part A and Part B medical reviews would 
lower the amount of improperly paid Medicare claims by 0.08 percent. 
However, CMS's senior medical review staff indicated that they had no 
prior knowledge of this actuarial estimate until we showed it to them. 
The staff told us that there is no evidence to realistically estimate 
the amount of savings that may result from consolidating the medical 
review responsibility for both parts. Furthermore, according to CMS 
staff, the greatest savings would likely come through computerizing 
medical reviews to automatically examine and compare Part A and Part B 
claims before they are paid. However, this capability is not currently 
possible, because Part A and Part B claims are processed on different 
payment systems, and developing a combined Part A and Part B claims 
processing system that could automatically compare Part A and Part B 
claims before payment would take years to complete.[Footnote 50]

Potential savings from improved fraud detection are also impossible to 
quantify, based on current information. The PSCs currently conduct 
fraud detection activities for both Part A and Part B in 40 states, the 
District of Columbia, Puerto Rico, and the Virgin Islands. As CMS 
implements contracting reform, the jurisdictions in which PSCs will 
conduct fraud detection for both parts may change. While CMS considers 
having a single PSC handling both Part A and Part B fraud detection a 
way to make its contractors more efficient, a senior official 
acknowledged that the agency had no evidence with which to determine 
whether having the PSCs conduct combined fraud reviews has been more 
effective in detecting fraud than having these reviews conducted by 
separate contractors for Part A and Part B. 

The consultant's estimate also anticipated that MACs will be able to 
pay claims more accurately than the current Medicare contractors, due 
to more effective medical review of claims, thus increasing claims 
denial rates. While noting that some elements of claim denials are not 
associated with contractor performance, the consultant assumed that 
better contractor performance could be equated with increased claims 
denial rates. The calculation for this assumption was based on the 
projection that contractor denial rates would increase[Footnote 51] and 
that half of these increased denials would lead to program savings. 
However, CMS program staff told us that they do not consider denial 
rates in their evaluation of contractor performance but instead 
evaluate claims administration contractors' rates of paying claims 
properly. The CMS program staff told us that they were not sure of the 
basis for the consultant's calculations, and one senior official stated 
that it was unclear whether more denials would occur with new MACs. 

Finally, the consultant projected that if CMS awards contracts 
competitively, contractors will have an incentive to operate more 
efficiently and to adopt the leading industry innovations that improve 
performance. The consultant expected these efforts to result in lower 
levels of improperly paid claims. This projection was based on a 1995 
GAO report that estimated that if Medicare contractors adopted the 
technology and capabilities used by private insurers to detect improper 
payments through automated claims reviews, Medicare payments for 
physicians' services and supplies could be reduced by 1.8 percent. 
Since that report was issued, CMS has made additional efforts to reduce 
improper payments. In addition, CMS was not certain that GAO's assumed 
savings were achievable. Recognizing this, the consultant reduced this 
portion of the savings estimate to a 0.09 percent reduction in Medicare 
fee-for-service payments. In the consultant's opinion, this adjusted 
for current error rates and CMS's opinion that the initial 1995 GAO 
estimate was too high. However, when we followed up with CMS in April 
2005, a senior official stated that while it would be realistic to 
expect some level of savings in the new competitive contracting 
environment, she did not know how the amount could be accurately 
quantified. 

Conclusions: 

The millions of dollars in savings that CMS envisions achieving through 
contracting reform in the early years of implementation are largely 
based on questionable estimates. However, these anticipated savings 
have been the driving force behind the agency's decision to accelerate 
its schedule for contracting with MACs. The agency has opted to 
transfer the entire current contractor workload to MACs 2 years ahead 
of the MMA time frame, in the hope of garnering savings to Medicare as 
quickly as possible. The accelerated schedule raises concerns for a 
number of reasons. First, CMS has never before undertaken a project of 
this scope and magnitude--one that affects more than 35 million 
beneficiaries and 1 million health care providers. If transitions do 
not run smoothly, operational disruptions could lead to delayed 
payments to providers and increased improper payments by contractors. 
With Medicare net improper payments estimated to be almost $20 billion 
annually, any potential increase is cause for concern. Second, while 
CMS's plan provides detailed information in some areas, other critical 
areas of the agency's plan are still being developed. Although the 
agency is employing a start-up cycle that will provide an opportunity 
to gain valuable FAR contracting experience, the ambitious schedule for 
the subsequent two cycles leaves little time for the agency to learn 
from the experience and resolve problems that might arise. Finally, 
attempting complex transitions of almost all of the claims 
administration workload in less than 2 years, in conjunction with 
changes in the data centers and financial management systems, 
significantly increases the risk that providers' claims will be paid 
improperly or not be paid at all. As CMS undertakes this important 
challenge, it is critical that the agency proceed at a prudent pace in 
order to apply lessons learned from early implementation experiences to 
future contracting cycles. 

Recommendation for Executive Action: 

To better ensure the effective implementation of Medicare contracting 
reform, we recommend that CMS extend its implementation schedule to 
complete its workload transitions by October 2011, so that the agency 
can be better prepared to manage this initiative. 

Agency Comments and Our Evaluation: 

In its written comments on a draft of this report, CMS noted that 
implementing Medicare contracting reform would enable the agency to 
improve the efficiency of the services delivered to Medicare 
beneficiaries and providers. CMS agreed that implementing contracting 
reform was a significant undertaking, but did not concur with our 
recommendation to extend its implementation schedule. CMS stated that 
by fully implementing MAC contracting 2 years earlier than required, it 
would achieve savings to the trust funds and operational efficiencies 
more quickly. In addition, CMS stated that extending the transition 
schedule would increase the risk of current contractors leaving the 
program before MAC contracts are awarded and eliminate the agency's 
flexibility to adjust its schedule in response to unforeseen changes 
and still meet the mandated implementation date. We believe that by 
accelerating its implementation schedule to transfer the entire 
Medicare claims processing workload to MACs by July 2009, CMS is 
assuming an unnecessary risk. While it is true that lengthening the 
implementation schedule could increase the possibility that one or more 
contractors might withdraw from Medicare prematurely, we see greater 
risk in attempting complex transitions without sufficient time for 
adequate planning and midcourse adjustments. When the considerable risk 
associated with accelerated implementation is considered in light of 
uncertain savings, a more prudent approach would be to use the time 
frame established in the MMA to fully develop implementation plans, 
evaluate lessons learned, and apply them to future acquisition cycles. 
In recommending that CMS extend its implementation schedule, we assume 
that the agency would allow sufficient time at the end of the final 
transition to adjust for problems and unforeseen circumstances and 
still meet the mandated implementation date of October 1, 2011. CMS 
agreed that it would need sufficient time for this kind of adjustment 
and has not developed plans for all contingencies. For example, CMS 
responded to a relatively short schedule slippage for its enterprise 
data center implementation by including in contract language the option 
for one of the DME MACs to run a data center on an interim basis. 
However, CMS will still have to develop the details of the contract and 
choose the most appropriate company to perform this work. This is one 
example of the many adjustments that will undoubtedly have to be made 
before all of the transitions are finished. 

CMS also stated that it disagreed with our conclusion about its 
readiness to conduct transitions to MACs. Our report did not conclude 
that CMS would not be ready to conduct transitions according to its 
proposed schedule. However, having a fully developed plan in place 
would assist CMS in conducting these transitions as smoothly as 
possible. As we stated in the report, CMS has recognized that it needs 
to develop certain critical areas in its plan and is taking steps to 
address them. For example, it is clear from its comments that the 
agency is very concerned about the risks involved in the complex 
transitions of claims workload and is planning mitigation actions--such 
as hiring a contractor to help manage the effort. CMS's comments 
provide additional information on other steps that it is taking to 
reduce or mitigate significant risks, coordinate the schedule for MAC 
implementation with other agency fee-for-service initiatives, develop 
detailed integrated implementation schedules, and address other GAO 
concerns. Nevertheless, the additional information provided by the 
agency generally reinforces our point that the agency's implementation 
plan, which was due to the Congress and to us in October 2004, is still 
a work in progress. For example, as we pointed out in the report, CMS's 
comments indicate that it has not completed its integrated 
implementation schedule and that it is leaving details concerning 
contractor coordination to MACs and other contractors. In addition, CMS 
has not finalized important implementation information, such as key 
performance measures or its MAC evaluation strategy and evaluation 
criteria for A/B MACs, or completed its proposal for a new 
organizational structure to oversee and manage the MACs. While CMS does 
have a risk management process, its current identification of risks and 
mitigation strategies lacks specificity and the agency has not 
completed a comprehensive risk mitigation plan. 

CMS also disagreed with our assessment of the quality of its cost and 
savings estimates. CMS said that its estimates of implementation costs 
were well informed by program experience and were the best available 
predictions of future costs. As we reported, CMS used information from 
previous transitions of contractor workload to help estimate its 
administrative costs. This grounded the estimate in the agency's past 
experience. However, CMS had to make assumptions about the amount of 
claims workload to be transferred and transition costs to be paid, 
which might turn out to be inaccurate. Unlike previous workload 
transitions, CMS is not requiring MACs to maintain staff and facilities 
from the former contractors. This should allow the MACs to gain 
efficiencies in operations, but CMS may end up paying more in severance 
pay or for start-up costs than estimated. Similarly, CMS's experience 
informed its estimate of administrative savings, but the estimate 
depends on assumptions about the efficiencies MACs will achieve that 
are difficult to predict with certainty. While CMS's assumptions about 
administrative costs and savings might appear reasonable, if the 
assumptions are inaccurate, the estimates will not reflect the real 
costs and savings over time. In addition, CMS indicated that because 
the costs of contract modifications were for operations after the 
transfer of claims workload, they should not be included in the 
implementation cost estimate. As CMS noted, its DME statement of work 
includes a provision for implementing a specific number of programmatic 
changes after the contract is awarded, to reduce the possibility that 
CMS would have to negotiate contract modifications that incurred 
additional costs. We modified our draft to clarify our discussion of 
the potential costs of contract modifications. 

Our greatest concern relates to CMS's consultant's estimate of savings 
to the trust funds. As we indicated in our report, the estimate of 
savings to the trust funds is generally based on little evidence and 
its underlying assumptions may not be reasonable, yet it played a 
significant role in CMS's decision to compress its implementation 
schedule. While CMS suggested that the savings estimate is 
conservative, the consultant who generated this estimate indicated that 
there were "enormous uncertainties" in estimating savings at this point 
in the implementation process. In its comments, CMS noted that our 
report highlighted the lack of direct evidence to support the amount of 
estimated savings. In response, CMS stated that the savings estimate 
was the best available, given that the changes proposed are 
unprecedented. CMS indicated that each of the three elements of the 
estimate of savings to the trust funds addresses a different aspect of 
the claims process. However, each of the three elements actually 
addresses the same aspect--MACs improving their medical and other 
claims review to increase denials of improper claims. CMS's comments 
indicate that its technical staff agree that the assumptions underlying 
this estimate are reasonable. We discussed these estimates with CMS 
officials most knowledgeable about medical and other claims review and 
they did not agree that the assumptions were based on evidence and were 
reasonable. Further, because each element in the savings estimate 
assumes improvement in claims review and improper claims denial, we 
think it is likely that CMS is double counting its potential savings. 
For example, the consultant estimated that the MACs would have higher 
claims denial rates, but also separately estimated savings from other 
aspects of claims review that--if conducted more efficiently--would 
lead back to higher claims denial rates. 

We are sending copies of this report to the Secretary of HHS, the 
Administrator of CMS, appropriate congressional committees, and other 
interested parties. We will also make copies available to others upon 
request. This report is also available at no charge on GAO's Web site 
at http://www.gao.gov. 

If you or your staff have any questions about this report, please 
contact me at (312) 220-7600 or aronovitzl@gao.gov. Contact points for 
our Offices of Congressional Relations and Public Affairs may be found 
on the last page of this report. GAO staff who made major contributions 
to this report are Sheila K. Avruch, Assistant Director; Sandra D. 
Gove; Joy L. Kraybill; Kenneth Patton; and Craig Winslow. 

Signed by: 

Leslie G. Aronovitz: 
Director, Health Care: 

[End of section]

Appendix I: Documents CMS Officials Have Identified as Constituting the 
Agency's Plan for Implementing Contracting Reform: 

The Centers for Medicare & Medicaid Services (CMS) has designated its 
report, entitled Report to Congress: Medicare Contracting Reform: A 
Blueprint for a Better Medicare, and the documents underlying this 
report as its plan for implementing Medicare fee-for-service 
contracting reform. Documents include the following:[Footnote 52]

* maps of jurisdictions for A/B Medicare administrative contractors 
(MAC), durable medical equipment (DME) MACs, and home health and 
hospice MACs;

* CMS's estimates for savings to the Medicare trust funds, 
administrative costs and savings, provider and beneficiary savings, and 
supporting narrative and information;

* MAC transition timelines;

* DME and A/B MAC project schedules;

* requests for information for A/B MACs and DME MACs, as published on 
FedBizOpps, including concepts of operations, draft statements of work, 
draft performance standards, and workload implementation handbooks;

* DME MAC request for proposals and related documents, including the 
final statement of work, as published on FedBizOpps;

* materials on beneficiary and provider customer service;

* materials concerning work on reengineering Medicare fee-for-service 
contract management processes;

* BearingPoint, Inc., Health Services Research & Management Group, 
Contractor Evaluation Improvement Project (CEIP) Strategy Paper, Final 
Report (McLean, Va.: Mar. 18, 2005);

* Centers for Medicare & Medicaid Services, Medicare Contracting 
Reform: Acquisition Strategy for Medicare Administrative Contractors, 
draft (Baltimore, Md.: Feb. 28, 2005);

* Centers for Medicare & Medicaid Services, MAC Implementation Project, 
Risk and Issue Management Process, Schematic (Baltimore, Md.: Jan. 24, 
2005);

* Centers for Medicare & Medicaid Service, MCMG Risk Management Plan 
for the Medicare Administrative Contractor Implementation Project, 
draft (Baltimore, Md.: Dec. 7, 2004);

* Centers for Medicare & Medicaid Services, Medicare Contracting 
Reform, Communication Plan (Baltimore, Md.: Nov. 10, 2004);

* LMI Government Consulting, Medicare FFS Contracting Reform: Level 
Five Work Breakdown Structure and Master Project Plan (McLean, Va.: 
October 2004);

* LMI Government Consulting, Medicare Fee-for-Service Contracting 
Reform: Assessment of Planning Needs (McLean, Va.: August 2004);

* Centers for Medicare & Medicaid Services, Report to the Medicare 
Contractor Oversight Board: Integration Issues in Modernizing Medicare, 
Final Report, submitted by CMS's fee-for-service project integration 
team (Baltimore, Md.: July 2, 2004), and related briefing documents; 
and: 

* Logistics Management Institute, Sensitive Assessment Center, Medicare 
Fee-for-Service Contracting Reform: Key Challenges (McLean, Va.: 
December 2003). 

Also see documents found at the following Web sites: 
http://www.cms.hhs.gov/medicarereform/contractingreform/ and 
http://www.cms.hhs.gov/medicarereform/contractingreform/whats_new/ 

[End of section]

Appendix II: Documents Used by GAO to Develop Criteria for Reviewing 
CMS's Plan for Contracting Reform: 

Selected provisions of section 1874A of the Social Security Act, added 
by section 911 of the Medicare Prescription Drug, Improvement, and 
Modernization Act of 2003 (MMA), Pub. L. No. 108-173, 117 Stat. 2066, 
2378--2386 (to be codified at 42 U.S.C. § 1395kk-1). 

Centers for Medicare & Medicaid Services, Contractor Reform--Update, 
September 22, 2004. 

Medicare fee-for-service contractor (unnamed), Contractor Suggestions 
Regarding Implementation of Medicare Administrative Contracts. Comments 
submitted to CMS by a current Medicare fee-for-service contractor. 
December 22, 2004. 

GAO, Business Process Reengineering Assessment Guide, GAO/AIMD-10.1.15 
(Washington, D.C.: May 1997). 

GAO, An Evaluation Framework for Improving the Procurement Function: A 
Guide for Assessing Strengths and Weaknesses of Federal Agencies' 
Procurement (Exposure Draft), (Washington, D.C.: October 2003). 

LMI Government Consulting, Medicare Fee-for-Service Contracting Reform: 
Assessment of Planning Needs (McLean, Va.: August 2004). 

[End of section]

Appendix III: GAO's Criteria for Evaluating CMS's Contracting Reform 
Plan: 

Element: Contracting reform planning and implementation; 
Subelement: Contracting reform objectives; Criteria: Does the plan 
explain contracting reform objectives, such as promoting competition 
and establishing better communication between contractors and 
beneficiaries?

Element: Contracting reform planning and implementation; 
Subelement: Scope; 
Criteria: Does the plan present an overview of how MAC implementation 
fits into broader agency plans?

Element: Contracting reform planning and implementation; 
Subelement: Schedule; 
Criteria: Does the plan state when major events will take place, 
including announcing MAC jurisdictions, issuing proposed performance 
measures for inclusion in A/B MAC contracts and requests for proposals, 
selecting DME MACs and A/B MACs, and completing the transition to MAC 
contracting?

Element: Contracting reform planning and implementation; 
Subelement: Budget; 
Criteria: Does the plan provide key information on budget and costs for 
contracting reform, such as estimated termination costs for current 
contractors, MAC operational costs, and performance incentives?

Element: Contracting reform planning and implementation; 
Subelement: Performance measures for contracting reform; 
Criteria: Does the plan provide high-level information on performance 
measures--that is, what constitutes success in contracting reform and 
how will progress be measured?

Element: Contracting reform management and oversight; 
Subelement: Risk management; 
Criteria: Does the plan identify a contingency or risk mitigation 
strategy for potential problems as contracting reform is being 
implemented?

Element: Contracting reform management and oversight; 
Subelement: Transition planning; 
Criteria: Does the plan address transition concerns and contingency 
planning for the transitions?

Element: Contracting reform management and oversight; 
Subelement: CMS staffing; 
Criteria: Does the plan explain how CMS staff will be organized and who 
will have specific roles and responsibilities in managing contracting 
reform?

Element: Contracting reform management and oversight; 
Subelement: Management and oversight structure; 
Criteria: Does the plan provide information on CMS's intended 
contractor management and oversight structure for MACs?

Element: Contracting reform management and oversight; 
Subelement: Human capital; 
Criteria: Does the plan provide an approach for ensuring that the 
agency has the right staff in the right numbers with the right skills 
in the right places to accomplish its mission effectively? This 
approach requires that an agency devote adequate resources to provide 
its acquisition workforce with the training and knowledge necessary to 
perform their jobs. It also requires long-range planning, including 
succession planning, to ensure the workforce has the necessary skills 
and qualifications to perform the procurement function into the future. 

Element: Implementation of MAC contracting; 
Subelement: Jurisdictions; 
Criteria: Does the plan provide information on MAC jurisdictions, 
including number and geographic areas?

Element: Implementation of MAC contracting; 
Subelement: Rollout plan; 
Criteria: Does the plan provide information on the jurisdictional 
rollout plan, and how this timeline might be affected by voluntary 
contractor withdrawals?

Element: Implementation of MAC contracting; 
Subelement: A/B strategy; 
Criteria: Does the plan discuss the strategy for combining Part A and 
Part B and associated implications or risks?

Element: Implementation of MAC contracting; 
Subelement: Contract acquisition; 
Criteria: Does the plan address the acquisition process for new 
contracts?

Element: Implementation of MAC contracting; 
Subelement: Eligibility of contractors; 
Criteria: Does the plan describe the eligibility criteria expected of 
MACs?

Element: Implementation of MAC contracting; 
Subelement: MAC functions; 
Criteria: Does the plan describe the functions that MACs will perform, 
such as developing local coverage decisions, determining payment 
amounts, making payments, educating beneficiaries, and communicating 
with providers?

Element: Implementation of MAC contracting; 
Subelement: Non-MAC functions; 
Criteria: Does the plan provide information on functions that will be 
assigned to non-MAC contracts?

Element: Implementation of MAC contracting; 
Subelement: Coordination concerning program integrity functions; 
Criteria: Is the plan clear in defining the roles of MACs and other 
contractors that conduct program integrity functions, so that program 
integrity efforts are not duplicative? Does the plan explain how MACs 
and other contractors will interface and coordinate their different 
program integrity activities?

Element: Implementation of MAC contracting; 
Subelement: Chains; 
Criteria: Does the plan provide information on how MACs will deal with 
chain providers, which is a concern for those with establishments in 
multiple MAC jurisdictions?

Element: Implementation of MAC contracting; 
Subelement: Performance requirements; 
Criteria: Does the plan address the establishment and definition of 
performance measures for MACs?

Element: Implementation of MAC contracting; 
Subelement: Policies and processes; 
Criteria: Does the plan provide clear, transparent, and consistent 
policies and processes that provide a basis for the planning, award, 
administration, and oversight of procurement efforts?

Source: GAO analysis of documents used to develop criteria for 
reviewing CMS's plan for contracting reform. 

Note: Documents used to develop criteria are listed in app. II. 

[End of table]

[End of section]

Appendix IV: Scope and Methodology: 

To conduct this evaluation, we consulted CMS to determine the documents 
included in its plan for contracting reform. Appendix I lists the 
documents that were identified by agency officials as included in CMS's 
contracting reform plan, including its Report to Congress, that were 
provided to us through June 3, 2005. We developed evaluation criteria 
to assess the extent to which CMS's plan provides an appropriate 
framework to implement Medicare contracting reform. To develop these 
criteria, we analyzed the statutory provisions added by section 911 of 
the MMA, documents and related information prepared to help CMS plan 
for contracting reform, and GAO guidance on assessing federal agencies' 
procurement functions. We also reviewed GAO's guidance on changing the 
approach through which mission-critical work is accomplished. These 
documents are listed in appendix II. The evaluation criteria we 
developed address contracting reform planning and implementation, 
contracting reform management and oversight, and CMS's contracting 
strategy for MACs and are listed in appendix III. We used these 
criteria to evaluate CMS's plan. In addition to this assessment, we 
also conducted interviews with officials at CMS headquarters and 
regional offices concerning the process for developing the plan, the 
implementation schedule, the challenges that CMS faces in implementing 
contracting reform, lessons learned that have prepared CMS for moving 
to the MAC environment, and the risks and benefits involved in the 
transition to MAC contracting. We also interviewed officials from four 
current Medicare contractors to obtain their views on CMS's contracting 
reform plan and the challenges, risks, and benefits involved in 
undertaking this effort. 

To assess the extent to which the plan's cost and savings estimates 
were sound enough to support decision making on implementation, we 
reviewed CMS's estimates for administrative costs and savings, savings 
to the Medicare trust funds, and supporting documentation. We evaluated 
the assumptions associated with the estimates. We conducted interviews 
with CMS officials who have been involved in developing estimates for 
the costs and savings related to Medicare contracting reform in order 
to understand the rationale upon which the estimates were based. We 
interviewed other CMS officials who work in program areas that will be 
affected by contracting reform to learn how they expect contracting 
reform to generate costs or savings in their program areas. We also 
interviewed a representative of CMS's actuarial contractor, which 
developed the savings estimates for the Medicare trust funds. We did 
not verify the reliability of CMS's data that were used to generate 
financial estimates. We performed our work from November 2004 through 
July 2005 in accordance with generally accepted government auditing 
standards. 

[End of section]

Appendix V: Comments from the Department of Health and Human Services: 

DEPARTMENT OF HEALTH & HUMAN SERVICES: 
Office of Inspector General:
Washington, D.C. 20201: 

JUL 29 2005: 

Ms. Leslie G. Aronovitz: 
Director, Health Care:
U.S. Government Accountability Office: 
Washington, DC 20548: 

Dear Ms. Aronovitz: 

Enclosed are the Department's comments on the U.S. Government 
Accountability Office's (GAO's) draft report entitled, "MEDICARE 
CONTRACTING REFORM: CMS's Plan Has Gaps and Its Anticipated Savings Are 
Uncertain" (GAO-05-873). These comments represent the tentative 
position of the Department and are subject to reevaluation when the 
final version of this report is received. 

The Department provided several technical comments directly to your 
staff. 

The Department appreciates the opportunity to comment on this draft 
report before its publication. 

Sincerely,

Signed by: 

Daniel R. Levinson: 
Inspector General: 

Enclosure: 

The Office of Inspector General (OIG) is transmitting the Department's 
response to this draft report in our capacity as the Department's 
designated focal point and coordinator for U.S. Government 
Accountability Office reports. OIG has not conducted an independent 
assessment of these comments and therefore expresses no opinion on 
them. 

HHS COMMENTS ON THE U.S. GOVERNMENT ACCOUNTABILITY OFFICE'S DRAFT 
REPORT ENTITLED, "MEDICARE CONTRACTING REFORM: CMS'S PLAN HAS GAPS AND 
ITS ANTICIPATED SAVINGS ARE UNCERTAIN" (GAO-05-873): 

The Department of Health and Human Services (HHS) appreciates the 
opportunity to comment on the U.S. Government Accountability Office's 
(GAO) draft report. 

General Comments: 

The improvement of services for Medicare program beneficiaries and 
providers and the efficient delivery of these services is a primary 
objective for HHS, Centers for Medicare & Medicaid Services (CMS). The 
Medicare contracting reform provisions outlined in Section 911 of the 
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 
(MMA) allow us to make these improvements through changes to the 
Medicare claims administration contracting practices. CMS agrees with 
GAO on a fundamental point achieving these envisioned improvements is 
not a trivial undertaking. However, CMS does not concur with GAO's 
recommendation and differs in conclusions regarding three broad areas 
addressed in its report: schedule suitability, transition readiness, 
and cost/savings estimate quality. 

Regarding the implementation schedule, while CMS has never before 
undertaken a project of this scope and magnitude, it believes that the 
potential savings to the Medicare Trust Fund and the envisioned 
benefits to beneficiaries and providers compel us to maintain our 
implementation schedule. As discussed further below, CMS has adopted 
and are implementing a number of strategies to effectively manage this 
project while sustaining the continuity of Medicare Fee-for-Service 
(FFS) administrative operations. 

All aspects of planning the details of the transition to the new 
environment are not yet final, and CMS is aggressively addressing the 
areas of concern noted in the report. Currently CMS is: (1) identifying 
and mitigating risks that may result from the transition to the new 
processes; (2) developing guidance on how the new Medicare 
administrative contractors (MACS) will coordinate with other 
contractors who are involved with ensuring that benefits and claims are 
paid; and (3) integrating and coordinating other CMS modernization 
initiatives that are being implemented concurrently with our 
contracting reform efforts. Addressing the areas of concern not only 
allows us to finalize the remaining transition planning details, but 
also provides us with a means by which to adjust quickly to any issues 
or situations that might force us to modify our plans. 

Finally, with respect to cost/savings estimates for contracting reform, 
while CMS agrees that its current plan is based partly on predicted 
future cost and savings estimates, CMS contends that these estimates 
and planning factors represent the best possible information. 

CMS appreciates GAO's acknowledgment of the elements of CMS's current 
implementation strategy that you believe CMS has fully addressed. In 
those cases in which CMS disagrees with the findings of the report, it 
has provided comments to address those concerns. Be assured that CMS is 
strongly committed to ensuring a transition to the new contracting 
environment for Medicare that is transparent to Medicare's 
beneficiaries and providers and confident that its current 
implementation strategy is fundamentally sound. 

GAO Recommendation: 

To better ensure the effective implementation of Medicare contracting 
reform, we recommend that CMS extend its implementation schedule to 
complete its workload transitions by October 2011, so that the agency 
can be better prepared to manage this initiative. 

HHS Response: 

While CMS acknowledges some of the points raised in this report, we do 
not concur with the GAO's recommendation. Since it is in the best 
interest of Medicare beneficiaries and providers, as well as the 
Government, to assertively procure and transition workload to the new 
MACs, CMS is taking the necessary steps to reduce or mitigate 
significant risks, align MAC implementation with other agency FFS 
initiatives, and create detailed baseline implementation schedules. 

By achieving full MAC implementation in 2009, CMS will realize the- 
benefits, both in terms of Trust Fund savings and operational 
efficiencies, more quickly than if the schedule were extended. The 
continuing development of modernized Information Technology (IT) 
systems will improve overall processing of claims, and implementing 
consolidated data centers will provide the necessary infrastructure to 
improve data collection and analysis while reducing costs. 

CMS believes that extending the transition schedule past 2009 will 
increase the risk of current fiscal intermediaries (FIs) and carriers 
leaving the program before competitions are finalized. A number of 
contractors only intend to stay in the program until their jurisdiction 
is completed. An extension of the schedule could cause them to 
reevaluate theirs plans and leave sooner. This, in turn, would lead to 
the deterioration of Medicare services, as contractor staff attrition 
over any extended period may increase, leaving the existing contractor 
short-staffed in terms of experienced employees. In addition, it would 
be difficult to replace these departures with capable staff, as that 
contractor's remaining time in the program would be of short duration. 
The promise of short-term employment would likely not encourage the 
acquisition of the most capable personnel. 

The schedule published in the 2005 report to Congress, Medicare 
Contracting Reform: A Blueprint for a Better Medicare, with a 2009 
completion date, provides CMS the flexibility to adjust in response to 
any unforeseen changes in the marketplace or legislative environment 
and still meet the statutory implementation date. CMS would not have 
this flexibility should it extend its baseline plan to finish 
implementation on or near October 1, 2011. 

GAO Concern: 

"For example, CMS has already begun to experience schedule slippage for 
its initiative to consolidate the contractors' data centers." (p. 25)

HHS Response: 

CMS still plans to begin consolidating the data centers in fiscal year 
(FY) 2006. The enterprise data center (EDC) procurement was moved by 
two months, while the implementation strategy was reviewed within CMS 
based on questions posed by industry to our draft request for proposal 
(RFP). The February 2006 award of EDC contracts will allow preliminary 
infrastructure work to be completed by June 2006, enabling the first 
EDC to be ready to coordinate with a Pilot A/B MAC contractor upon 
award. The EDC FFS Transition schedule is being fully integrated with 
the A/B MAC Cycle 1 and Cycle 2 procurement schedules. 

CMS has determined that the most efficient and effective approach will 
include implementing two data centers instead of four. This will 
increase savings and improve standardization of the future data center 
environment. The only impact of the additional review at CMS was the 
potential availability of EDCs for durable medical equipment (DME) 
MACs. CMS had already recognized this risk and a data center option was 
included in the DME MAC RFP, which provides CMS the flexibility to 
consolidate DME MAC claims processing into one data center run by a DME 
MAC contractor if cost effective. 

GAO Concern: 

"For example, the plan lacks a detailed schedule to coordinate reform 
issues with other major initiatives CMS intends to implement at the 
same time period." (Highlights)

HHS Response: 

CMS is completing an integrated project schedule for the major 
initiatives it plans to accomplish during the same timeframe as 
implementation of section 911 of the MMA and will have a more detailed 
schedule soon. Most recently, CMS's FFS project integration team has 
worked to align assumptions, schedules, and resource competitions among 
all projects for the first two MAC procurement rounds (DME and A/B 
start-up cycle). CMS has defined MAC implementation as the "anchor" 
project for integration purposes. While CMS components are working 
together to align projects, CMS believes the MAC implementation 
timeframe should be firmly anchored first, followed by alignment and 
coordination of other initiatives. These efforts have resulted in 
project plan modifications for some FFS functional activities, such as 
consolidated EDCs, the Standard Front-End, Qualified Independent 
Contractors (QICs), and Beneficiary Contact Centers (BCCs). 

As CMS continues to refine its more near-term schedules, it continues 
to work to ensure integrated schedules for the first and second cycles 
of AB MAC procurements and transitions. In addition, CMS is employing a 
commercial off-the-shelf software tool to more easily track its project 
schedules and information; CMS launched this tool for major projects in 
mid-July, 2005. These efforts will help CMS closely monitor its 
established schedules for changes and impacts to dependent projects. 

GAO Concern: 

"However, CMS has yet to develop many details, including information on 
the specific steps that will be used to facilitate contractor 
coordination." (p. 20)

HHS Response: 

It is clear that the roles played by the FFS functional contractors are 
inherently interwoven into the work of the MAC. Coordination among 
these entities is essential to the overall claims administration 
process, and it is CMS's intent to closely oversee the functioning of 
these relationships in the context of monitoring the overall 
performance of each contract. 

To facilitate this coordination, the A/B MAC statement of work (SOW) 
requires joint operating agreements (JOAs) between the MAC and key 
functional contractors that will interface with the MAC. These 
functional contractors include program safeguard contractors (PSCs), 
QICs, quality improvement organizations (QIOs), recovery audit 
contractors (RACs), and BCCs. 

In the MAC SOW, it is recommended that MACs include the following 
topics in their JOAs with these functional contractors: 

* Confidentiality; 
* Definitions; 
* Contract Roles and Responsibilities; 
* Dispute Resolution; 
* Connectivity; 
* Communication. 

CMS's approach to the establishment of JOAs is nonprescriptive. CMS 
believes that the key parties to the JOA (the MAC and functional 
contractor) will best identify and agree on the specifics of their 
operational interactions if the responsibility for doing so is 
delegated to those entities. Each MAC and functional contractor must 
share responsibility for establishing, negotiating, and maintaining 
agreement in accord with achieving the expectations of their respective 
SOWS. At the same time, as part of performance-based contracting, CMS 
is working to create incentives that will motivate both MAC and 
functional contractors to operate effectively by ensuring that they 
coordinate among themselves. 

GAO Concern: 

".. CMS' plan does not comprehensively detail steps to address 
potential risks during the transition of claims workload from current 
contractors .. " (Highlights): 

HHS Response: 

CMS agrees that contracting reform is a project that poses certain 
inherent risks and, as such, is fully aware of the need for a 
comprehensive risk management program. CMS staff have been building an 
ongoing risk management program, complete with a risk database that 
captures and manages risks as they are identified. Under the process of 
continuous risk management, risks will continue to be identified 
throughout the life of this project, and strategies to prioritize and 
mitigate high risks will continue to be developed and implemented. Risk 
owners are assigned to develop and implement risk responses, including 
mitigation plans, where appropriate. CMS is committed to successfully 
expanding and enhancing its MAC implementation risk management program 
and coordinating that with the risk management programs for the other 
segments of FFS contracting reform. For example, CMS staff is now 
combining the various risk responses into a comprehensive mitigation 
plan both for MAC implementation and for the larger integrated FFS 
contracting reform. 

GAO Concern: 

The GAO has identified concerns with a few specific risks of the 
contracting reform project. (P. 9): 

HHS Response: 

CMS agrees with GAO that continuity of payment operations for health 
care providers is one of CMS' primary concerns (especially in a project 
such as this one), as is the assurance that those payments are made 
properly. 

The number and scale of the proposed workload transitions under 
contracting reform is significantly greater than the numerous 
individual transitions CMS has successfully completed over the past 
decades. As such, this risk will be given appropriate attention by CMS 
leadership and contractors alike. CMS has extensive experience in 
managing transitions and the tasks required for a successful 
transition. These transition tasks for the movement of Medicare 
workload and operations have not changed because of contracting reform. 
However, to assist us in managing concurrent jurisdiction transitions, 
CMS will hire an experienced project management support contractor with 
Medicare-knowledgeable staff. This contractor will monitor individual 
segment transition activities and assist us in our integration and 
coordination efforts with multiple jurisdiction transitions. 

CMS agrees that voluntary contractor withdrawals could have a 
significant impact on contracting reform implementation, and has 
developed a set of strategies for mitigating this risk. In fact, a 
recent contractor withdrawal was addressed using the plans CMS had 
prepared. 

Inherent risks are associated with any transition, and the complexity 
of multiple data center transitions at one time may increase these 
risks. CMS staff have successfully moved data centers before in 
conjunction with contractor transitions. Additionally, CMS will gain 
lessons learned as it conducts the Start-up A/B MAC transitions. The 
hands-on experience with transitioning multiple workloads and data 
centers into the EDC environment will also provide a strong foundation 
for the oversight required for implementing MAC Cycle 1 and Cycle 2 
transitions. Completion of transitions to EDCs will reduce future risk 
in MAC procurements, since data centers will not have to change at the 
same time. 

CMS will leverage the expertise of a transition support contractor to 
provide separate teams for the overlapping Medicare data center 
transitions while employing an integrated schedule. CMS's intent is to 
ensure that current data centers leaving the program are transitioned 
within one year from the start of their transition. CMS has also fully 
included requirements for transition planning in the EDC RFP. This 
approach will allow CMS the opportunity to evaluate the expertise of 
the potential EDC vendors and ensure that the relevant transition 
expertise is available to further mitigate these risks. 

GAO Concern: 

"Although CMS has done extensive work toward developing a strategy that 
outlines how it intends to implement MAC contracting, the agency's plan 
lacks important implementation information in some areas." (p.19): 

HHS Response: 

CMS is making every effort to assure that stakeholders have received 
all appropriate information related to the MAC procurements and their 
implementation and will continue to do so. Requests for Information 
(RFIs) were released on www.fedbizopos.com for both the DME and A/B MAC 
procurements. CMS released its performance measures for the A/B MAC in 
an RFI on April 11, 2005, and received 630 comments. Key performance 
measures will be incorporated in the incentive structure as defined in 
a mutually' agreed upon award fee plan, with the winning offer (an 
initial award fee plan will be released in September with the RFP). In 
addition, the evaluation criteria for the A/B MAC were released in an 
RFI on June 3, 2005. CMS is currently reviewing the comments received 
on this RFI. 

GAO Concern: 

"For example, the plan does not fully explain CMS' strategy for 
monitoring MACs' performance." (pp. 3-4): 

HHS Response: 

CMS has continuously worked to improve the oversight and evaluation of 
Medicare contractors under Title 18. While the structure for oversight 
under MAC contracting is not currently in place, CMS is implementing a 
new oversight methodology that it plans to have fully in place when 
MACS are operational. 

Under the Title 18 authority, CMS implemented Contractor Performance 
Evaluations using national teams that conducted periodic onsite 
evaluations based on risk assessments. Under MAC implementation, CMS 
will begin a shift from inspections to surveillance by developing 
currently available data sources and new reporting capabilities. With 
Medicare contracting reform, CMS will transition to a new oversight the 
model based on a centralized approach and real-time surveillance. This 
approach, labeled the Contractor. Surveillance and Assessment Program, 
is built upon four elements of effective contractor oversight: 

* Real-time surveillance of contractor operations using a performance 
dashboard,

* Data validation by CMS of contractor self-reported information,

* Analysis of contract deliverables, and: 

* Continued use of periodic onsite evaluations predicated upon risk 
assessments and legislative mandates. 

These elements will support the development of contractor specific 
performance scorecards and will be integrated with oversight of 
contractor quality management systems. 

GAO Concern: 

"CMS has not completed its plan for organizational changes .. " (p. 22) 

HHS Response: 

CMS understands the criticality of having an organizational structure 
that will support contracting reform and has been working to develop 
such a structure. CMS has reorganized the two internal FFS governing 
bodies (the FFS Governance Council and the FFS Operations Board) to 
better function in the MAC environment. CMS also has engaged both 
central and regional office staff to develop a detailed structure and 
process that will oversee the new MAC contractors. 

The organization of MAC oversight is addressed in an initial draft of 
the future MAC Administration and Contract Management structure that 
CMS has developed. This document outlines the reporting lines for an 
effective management team in the matrix-oriented organization. To 
control the number of "touch points" to the Project Officer (PO), this 
model establishes a limited number of PO contacts, while maintaining a 
flow of information from all critical functional areas and locations. 

Additionally, CMS has developed a draft process flow diagram and 
supporting documents depicting the communication flow needed to monitor 
the new MAC contracts. The process shows the three most critical 
oversight areas: deliverables, invoices, and contractor performance. 
The model displays the interrelation among the various forms of 
contract monitoring and follows the same communication lines 
established in the previously mentioned administration and contract 
management, structure. 

GAO Concern: 

The plan's savings estimates are too uncertain to support decisions on 
contracting reform implementation because they are based on future 
developments that are difficult to predict. (p. 4): 

HHS Response: 

CMS's Office of the Actuary (OACT) recognizes that the estimates of 
Trust Fund savings for activities such as this are uncertain. However, 
the estimated savings were intended to be somewhat conservative (low) 
because of the uncertainty involved. The Actuarial Research Corporation 
report points out that the Office of Inspector General estimates a 
Medicare claims processing error rate of 6 percent in 2002, although 
the financial loss is undoubtedly smaller than this since many of the 
errors do -not result in permanent denial of the claim but require only 
technical corrections from the provider submitting the claim. The 
combined savings claimed for the three provisions is about 0.2 percent 
of program costs after being fully phased in after several years. 
[NOTE] 

NOTE: 

The estimates for: 

(a) requiring contractors serving as fiscal intermediaries to process 
both part A and part B claims is .08% for both Part A and Part B,

(b) reducing the number of contractors to 15 plus the specialty 
contractors for DME and HHA claims is .05% for Part A and .02% for part 
B, and: 

(c) selecting contractors by competitive bidding is .09% for both Part 
A and Part B. 

Probably due to a typo in the consultant's report, this last figure has 
been incorrectly quoted as 0.9% (.009 instead of.0009) but the 
derivation shown in the report and the value used and shown in the 
tables accompanying report are correct. 

The GAO draft report refers to the possibility of double counting of 
savings because similar methods were used in the three estimates. The 
OACT does not concur that there is double counting as the estimates 
apply to different parts of the claims process. The GAO report also 
calls attention to the lack of direct evidence that the proposed 
activities will result in savings of the order of magnitude claimed. 
Because the changes proposed are unprecedented, CMS has submitted 
estimates, which it believes are the best available, with appropriate 
caveats. 

GAO Concern: 

In its draft, GAO argues that it is "difficult," even "impossible, "to 
accurately predict how much contracting reform implementation will 
cost. GAO further argues that the new contracting environment will 
differ considerably from the current one and that CMS' estimates are 
based on certain questionable evidence and assumptions. (pp. 27-32): 

HHS Response: 

While any predictions of future costs will be uncertain, CMS maintains 
that its estimates of implementation costs are both well informed by 
program experience and the best available. CMS used statistical 
analysis of the historic relationship between workload size and 
transition/termination costs and its assumptions as to the probable 
general success rate of incumbent contractors, as well as the effects 
of the transition schedule. The GAO report gives the impression that 
the assumptions CMS used to develop its cost estimates are no more or 
less plausible than alternative assumptions that could have been 
applied. On the contrary, CMS formulated the assumptions used in its 
administrative costing model based on considerable analysis using 
historical data from actual Medicare operational workload conditions. 
Similarly, CMS's assumptions relating to contractor incentives and 
administrative efficiencies (savings) were developed based on extensive 
analysis and historic CMS experience. CMS believes that its estimating 
efforts have been very reasonable, but will improve them as this 
initiative unfolds and better data (including actual experience) 
becomes available. 

GAO Concern: 

The savings estimates were developed by an external consultant. (p. 32) 
HHS Response: 

OACT has reviewed the estimates and concurs with them. Estimates for 
these activities are inherently uncertain; however, the OACT consultant 
has provided the best, unbiased estimates possible. The estimates are 
intended to be somewhat conservative because of the uncertainty 
involved. The consultant, the Actuarial Research Corporation, has 
extensive experience in doing cost estimates for the Medicare program 
and has provided assistance to the OACT for many years. The OACT is 
confident these are the best estimates available. 

The draft report suggests that the estimates did not receive as much 
internal CMS review as would be desirable. While individual CMS 
operating components, such as medical review, were not directly 
involved in the development of these cost estimates, CMS technical 
staff in this area agree that the contractor used reasonable 
assumptions in developing its cost savings estimates. For example, 
consolidating Part A and Part B operations claims processing functions, 
as well as medical review functions, will presumably lead to 
significant overall cost savings because of a more integrated data 
structure for Parts A and B. 

GAO Concern: 

"A potential cost omitted from CMS's estimates is funding for MAC 
contract modifications." (p. 30)

HHS Response: 

CMS does not agree with GAO's discussion on pages 30 and 31 about the 
potential cost of MAC contract modifications being omitted from its 
cost estimates. The cost of contract modifications is ongoing (i.e. 
operational) cost and it should not have been included in 
implementation cost estimates. Operational costs are those incurred by 
the MACs in performing the work specified in the SOW. The instructions 
issued to potential bidders for DME MAC work directed them to assume, 
for proposal purposes only, a level of effort for implementing a 
specified number of changes. Thus, the potential cost of routine work 
required after the contracts are awarded has been considered. 

[End of section]

Appendix VI: CMS's MAC Procurement and Transition Schedule: 

Figure 5 shows CMS's procurement and transition schedule for MACs, as 
of June 2005. During one start-up cycle and two additional transition 
cycles, CMS will conduct competitions to select a total of 23 MACs. In 
the first phase of the start-up cycle, CMS will select four MACs that 
will be administering claims for DME, prosthetics, orthotics, and 
supplies--called DME MACs. In the second phase of the start-up cycle, 
CMS will select one of the MACs that will be responsible for paying 
Part A and Part B claims--called A/B MACs. During cycle one, CMS will 
select seven A/B MACs. During cycle two, CMS will select seven A/B MACs 
and four MACs that will be responsible for administering claims for 
home health and hospice (HH) care, called HH MACs. 

Figure 5: CMS's MAC Procurement and Transition Schedule: 

[See PDF for image]

Notes: Based on information from CMS. The request for proposals (RFP) 
announces CMS's intent to award a contract and specifies the service or 
product to be delivered, the criteria to be used, applicant 
qualifications, deadline, and other relevant information. In this 
figure, the date under RFP indicates when it was, or will be, first 
issued. The date under award indicates when CMS intends to announce 
publicly that the contract has been awarded. Cutover occurs when all 
work has been transferred to the MAC from the prior claims 
administration contractors. The date under cutoff indicates when CMS 
anticipates the transfer of work for these contracts to be completed. 

[End of figure]

[End of section]

Appendix VII: Jurisdictional Map of the Current Fiscal Intermediaries: 

[See PDF for image]

Notes: Fiscal intermediaries administer Part A and Part B claims paid 
to hospitals and other institutions, such as home health agencies. The 
figure indicates jurisdictions of companies that serve as fiscal 
intermediaries. Mutual of Omaha also serves as a fiscal intermediary to 
providers in all states except New York and Puerto Rico. 

[End of figure]

[End of section]

Appendix VIII: Jurisdictional Map of the Current Carriers: 

[See PDF for image]

Note: Carriers administer the majority of Part B claims for the 
services of physicians and other providers. 

[End of figure]

[End of section]

Appendix IX: Jurisdictional Map of the Current Regional Home Health 
Intermediaries: 

[See PDF for image]

Note: Regional home health intermediaries process Medicare home health 
and hospice claims. 

[End of figure]

[End of section]

Appendix X: Jurisdictional Map of the Current Durable Medical Equipment 
Regional Carriers: 

[See PDF for image]

Note: DME regional carriers pay claims for DME, prosthetics, orthotics, 
and supplies. 

[End of figure]

[End of section]

Appendix XI: Jurisdictional Map of the 15 New Medicare Administrative 
Contractors: 

[See PDF for image]

Notes: This map shows the jurisdictions for the MACs that will pay Part 
A and Part B claims, other than claims for HH care and for DME, 
prosthetics, orthotics, and supplies. These MACs will be called A/B 
MACs. 

[End of figure]

[End of section]

Appendix XII: Jurisdictional Map of the Four DME MACs and the Four HH 
MACs: 

[See PDF for image]

Note: This figure indicates the jurisdictions for MACs that will pay 
some specific types of claims. The DME MACs will pay claims for DME, 
prosthetics, orthotics, and supplies. The HH MACs will pay claims for 
HH care. 

[End of figure]

[End of section]

FOOTNOTES

[1] Pub. L. No. 108-173, § 911, 117 Stat. 2066, 2378--2386 (to be 
codified at 42 U.S.C. § 1395kk-1). 

[2] Until July 1, 2001, CMS was called the Health Care Financing 
Administration. We use the name CMS throughout this report. 

[3] 48 C.F.R. ch. 1 (2004). 

[4] Department of Health and Human Services, Report to Congress: 
Medicare Contracting Reform: A Blueprint for a Better Medicare 
(Washington, D.C.: Feb. 7, 2005). 

[5] We reviewed the Report to Congress and additional documents that 
CMS designated as part of its contracting reform plan that the agency 
provided to us by June 3, 2005. 

[6] Medicare Part A covers inpatient hospital care, skilled nursing 
facility care, some home health care services, and hospice care. Part B 
services include physician and outpatient hospital services, diagnostic 
tests, mental health services, outpatient physical and occupational 
therapy, ambulance services, some home health services, and medical 
equipment and supplies. 

[7] For example, from 1977 through 1986, eight competitive contracts, 
which were designed to consolidate the workload of two or more small 
contractors, were established on an experimental basis. More recently, 
in 2004, CMS conducted a competitive procurement to replace the fiscal 
intermediary for Washington and Alaska. However, the competition was 
limited to Medicare fiscal intermediaries and carriers. 

[8] The Social Security Act generally provided that Medicare use cost- 
based reimbursement contracts, under which contractors are reimbursed 
for necessary and proper costs of carrying out program activities. 
These contracts did not expressly provide for profit. Nevertheless, 
since the 1980s, CMS has had some limited authority to build financial 
incentives into contracts. See 42 U.S.C. § 1395h note (2000). 

[9] Workload is the total work performed by a Medicare claims 
administration contractor, with the amount usually expressed as the 
number of claims processed annually. 

[10] After the MAC contracts are awarded, the work performed by the 
outgoing Medicare claims administration contractors will be transferred 
to MACs. These transition activities include transferring data, 
records, and other functions to MACs. 

[11] Beneficiaries and Medicare providers, on behalf of their 
beneficiaries, can appeal denied claims for services. At the first 
appeal level, the Medicare claims administration contactor reexamines 
the claim along with any additional documentation provided by the 
appellant. If the contractor upholds the decision to deny the claim, 
the appellant may appeal the decision further. 

[12] CMS contracted for the PSCs as part of the Medicare Integrity 
Program, created by the Health Insurance Portability and Accountability 
Act of 1996. In addition to the activities cited above, PSCs conduct 
cost report audits and provider education related to program safeguard 
activities. 

[13] Medical reviews of submitted claims are conducted either before or 
after payment to determine if the claims should be, or should have 
been, paid. Claims are reviewed to see if the beneficiaries' conditions 
meet the Medicare coverage criteria. If medical reviews identify claims 
that should not have been paid, the Medicare claims administration 
contractor that paid the claim is responsible for collecting 
overpayments. 

[14] Investigation of suspected fraud can involve conducting a more 
detailed analysis of claims and other investigative steps. Once a case 
has been developed, it is referred to HHS's Office of Inspector General 
or to other law enforcement agencies for investigation or prosecution. 

[15] One PSC currently conducts medical reviews and benefit integrity 
activities for the claims processed by the remaining DME regional 
carrier. 

[16] PSCs currently conduct medical reviews of claims processed by 2 
fiscal intermediaries and 2 carriers. The remaining 23 fiscal 
intermediaries and 16 carriers conduct their own medical reviews of the 
claims they process. 

[17] As of October 1, 2004, different contractors processed Part A and 
Part B claims in 39 states and the District of Columbia, and the same 
contractor processed both Part A and Part B claims in 11 states. 

[18] Department of Health and Human Services, Report to Congress, I-2. 

[19] CMS aligned the jurisdictions so that the 15 A/B MAC jurisdictions 
fit within the boundaries of the 4 DME MACs and the 4 HH MACs. 
Jurisdictions are identical for the DME MACs and the HH MACs. 

[20] According to CMS, the new MAC jurisdictions will include from 1.1 
million to 3.4 million beneficiaries and from 21,000 to 76,000 
physicians. 

[21] The Web site's address is 
www.cms.hhs.gov/medicarereform/contractingreform/. It was established 
on March 15, 2004. 

[22] A statement of work is the portion of a contract that describes 
the actual work to be done by the contractor by means of 
specifications, performance dates, and quality requirements. 

[23] The MMA required that CMS consult with providers, beneficiary 
organizations, and others on the development of performance 
requirements and standards for MACs. 

[24] The Web site's address is http://www.fedbizopps.gov/. It provides 
information on federal government procurement opportunities over 
$25,000. 

[25] Department of Health and Human Services, Report to Congress, III- 
3. 

[26] Each acquisition cycle begins with the issuance of the request for 
proposals, which announces CMS's intent to award a contract. The cycle 
also includes a transition period, which begins with the award of the 
contract and ends when all work has been transferred to the MAC from 
the prior claims administration contractor. 

[27] The first acquisition cycle will affect about 44 percent of the 
claims processing workload and the second acquisition cycle will affect 
about 47 percent. However, a smaller percentage of the claims workload 
may need to be transferred, since some of the current contractors may 
become MACs for jurisdictions that include part of their current 
service areas. 

[28] For example, lack of staff resources dedicated to transition 
efforts contributed to a slow implementation of updated 
telecommunications services to federal agencies, which led to increased 
costs and difficulties in holding service contractors accountable for 
their performance. See GAO, FTS2001: Contract Transition Delays and 
Their Impact on Program Goals, GAO-01-544T (Washington, D.C.: Apr. 26, 
2001). 

[29] Subsequent transitions in the next two cycles will transfer 
workload to the new MACs from two to as many as seven current fiscal 
intermediaries and carriers. Furthermore, transitions may involve 
transferring some work to functional contractors, such as the 
contractor that will be responsible for handling beneficiary inquiries. 

[30] The request for proposals announces CMS's intent to award a 
contract and specifies the service or product to be delivered, the 
criteria to be used, applicant qualifications, deadline, and other 
relevant information. 

[31] GAO, Medicare: HCFA Oversight Allows Contractor Improprieties to 
Continue Undetected, GAO/T-HEHS/OSI-99-174 (Washington, D.C.: Sept. 9, 
1999); Medicare: HCFA Should Exercise Greater Oversight of Claims 
Administration Contractors, GAO/T-HEHS/OSI-99-167 (Washington, D.C.: 
July 14, 1999); Medicare: Improprieties by Contractors Compromised 
Medicare Program Integrity, GAO/OSI-99-7 (Washington, D.C.: July 14, 
1999); and Medicare Contractors: Despite its Efforts, HCFA Cannot 
Ensure Their Effectiveness or Integrity, GAO/HEHS-99-115 (Washington, 
D.C.: July 14, 1999). 

[32] CMS's Medicare fee-for-service contractor evaluation work group 
was established to compile an inventory of all internal and external 
contractor assessments and to research alternative frameworks to 
integrate contractor evaluation, reporting, and follow-up activities. 

[33] We found similar problems in 1999. We reported that CMS's 
headquarters office had not set contractor oversight priorities, 
leaving such decisions almost entirely to regional office reviewers. 
This led to inconsistent contractor evaluations by regional reviewers, 
which made it more difficult for CMS to determine which contractors 
were performing effectively. See GAO/HEHS-99-115. 

[34] CMS's contracts that are governed by the FAR include those with 
quality improvement organizations and PSCs and for Medicare systems 
maintenance and data centers. 

[35] We reported in 2000 that while responsibility for overseeing 
contractor performance was dispersed among central office components 
and the agency's 10 regional offices, lines of accountability had not 
been clearly established. The regional office staff who were 
responsible for overseeing contractors were not directly accountable to 
the central office group responsible for contractor oversight 
activities. GAO, Medicare Contractors: Further Improvement Needed in 
Headquarters and Regional Office Oversight, GAO/HEHS-00-46 (Washington, 
D.C.: Mar. 23, 2000). CMS took steps to address this issue. While the 
agency was reviewing a draft version of our report, it announced that 
it was making organizational changes to improve regional 
accountability. 

[36] For example, while the Center for Medicare Management's Medicare 
Contractor Management Group has overall responsibility for managing 
claims administration contractors, the Office of Financial Management 
has significant responsibilities for the contractors' financial and 
program integrity activities, and the Office of Information Systems is 
responsible for oversight and security of the information systems used 
to pay claims. In addition, regional staff are currently responsible 
for monitoring the claims administration contractors' activities and 
helping to evaluate their performance. 

[37] GAO, Business Systems Modernization: Internal Revenue Service 
Needs to Further Strengthen Program Management, GAO-04-438T 
(Washington, D.C.: Feb. 12, 2004), and Information Technology: DOD's 
Acquisition Policies and Guidance Need to Incorporate Additional Best 
Practices and Controls, GAO-04-722 (Washington, D.C.: July 30, 2004). 

[38] The official told us that the agency's integration planning 
efforts had been delayed until the agency's Report to Congress was 
issued in February 2005, in part because of the concern that 
procurement-sensitive information might be prematurely made public. 

[39] Department of Health and Human Services, Report to Congress, III- 
7 and III-8. 

[40] To be able to negotiate yearly costs with the MACs prior to the 
beginning of the contract period, CMS plans to request adjustments to 
its budget authority to change the period of performance for MACs to 
coincide with the calendar year, instead of the current fiscal year 
basis. Changing the period of performance will not increase or decrease 
overall or net administrative outlays and is not included in the 
administrative cost estimate. 

[41] Department of Health and Human Services, Report to Congress, IV-3. 

[42] The MMA mandates that contracting reform be completed before 
October 1, 2011, the first day of fiscal year 2012. Although all of the 
transitions to MACs are planned to be completed by July 2009, some of 
the costs--such as IT enhancement and oversight--will be incurred 
through fiscal year 2011. 

[43] CMS is simultaneously implementing other IT-related initiatives, 
which are not considered to be part of contracting reform and are not 
included in the contracting reform costs. 

[44] CMS had planned to begin consolidating the data centers in fiscal 
year 2006, so this cost is reflected in its estimated costs for 
contracting reform. However, in May 2005, the data center consolidation 
initiative was postponed for about 2 months. CMS anticipates awarding 
the data center contracts in February 2006, about 5 months later than 
originally planned. 

[45] CMS currently plans to consolidate the A/B MACs' front ends, to 
coincide with the beginning of the cycle one A/B MAC implementation. 
The agency is developing requirements for the A/B MAC standardized 
front end. It plans to award a contract in early fiscal 2007 and be 
ready to implement the standardized front end by the fall of 2007. 

[46] In its technical comments on a draft of this report, CMS stated 
that it has updated its IT cost estimate to reflect the adjustments to 
the data center consolidation initiative and to include the standard 
front end initiative. This updated estimate is somewhat higher than 
CMS's original estimate and was not available as of July 29, 2005. CMS 
plans to make its estimate final and public through the official budget 
process. 

[47] GAO, Defense Health Care: Continued Management Focus Key to 
Settling TRICARE Change Orders Quickly, GAO-01-513 (Washington, D.C.: 
Apr. 30, 2001). 

[48] In its technical comments on a draft of this report, CMS stated 
that it has updated its IT savings estimate to reflect the adjustments 
to the data center consolidation initiative and to include the standard 
front end initiative. This updated estimate is somewhat higher than 
CMS's original estimate and was not available as of July 29, 2005. CMS 
plans to make its estimate final and public through the official budget 
process. 

[49] The Report to Congress noted an estimated savings of $900 million 
to the Medicare trust funds by the end of fiscal year 2010. 

[50] CMS's goal is to have a unified claims processing system in 2011, 
but the consultant's estimate assumes that savings will be generated 
from combined medical reviews much sooner. 

[51] The consultant calculated this expected increase in denials by 
dividing all current carriers and fiscal intermediaries into quartiles, 
based on their current claims denial rate. Then, the consultant assumed 
that the denial rate for the bottom half of contractors in each 
quartile could be expected to increase to the median denial rate for 
that quartile. 

[52] Where documents were prepared by support services contractors and 
contain recommendations, CMS may have chosen not to adopt all 
recommendations or not to adopt them in full. 

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