Medicare Financial Management: Further Improvements Needed to Establish Adequate Financial Control and Accountability

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

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

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

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

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

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