oversight

HCFA Management: Agency Faces Multiple Challenges in Managing Its Transition to the 21st Century

Published by the Government Accountability Office on 1999-02-11.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                              United States General Accounting Office

GAO                           Testimony
                              Before the Subcommittee on Health, Committee on Ways
                              and Means, House of Representatives




For Release on Delivery
Expected at 2:30 p.m.
Thursday, February 11, 1999
                              HCFA MANAGEMENT

                              Agency Faces Multiple
                              Challenges in Managing Its
                              Transition to the 21st
                              Century
                              Statement of William J. Scanlon, Director
                              Health Financing and Public Health Issues
                              Health, Education, and Human Services Division




GAO/T-HEHS-99-58
HCFA Management: Agency Faces Multiple
Challenges in Managing Its Transition to the
21st Century
               Mr. Chairman and Members of the Subcommittee:

               We are pleased to be here today to discuss the Health Care Financing
               Administration’s (HCFA) ability to meet its new and growing
               responsibilities. HCFA pays for health care coverage for nearly a quarter of
               the population. Two of the programs HCFA administers cost federal and
               state taxpayers about $370 billion in fiscal year 1998—$193 billion for
               Medicare and $177 billion for Medicaid—and represent an ever growing
               proportion of the federal budget—currently about 18 percent. Because of
               the size and complexity of its programs, we have been reviewing HCFA’s
               operations since the agency was created more than 20 years ago. Over the
               years, we have reported on problems in HCFA’s management that weakened
               the fiscal integrity of these programs—leading to increased monetary loss
               from fraud, abuse, and erroneous payments. We have also reported on
               management problems that have led to poor-quality care provided to
               vulnerable beneficiaries. In 1990, we developed a list of agencies and
               programs that were “high risk” because of their vulnerability to waste,
               fraud, abuse, and mismanagement. We included Medicare on our original
               list, and it remains on the list to this day.

               The long-term financial condition of Medicare is now one of the nation’s
               most pressing problems. Recent legislation gave HCFA substantial new
               authorities and responsibilities for reforming Medicare in order to extend
               the solvency of Medicare’s Hospital Insurance Trust Fund beyond 2008.
               This legislation also established the Bipartisan Commission on the Future
               of Medicare to develop more long-term solutions for further ensuring
               Medicare’s integrity and solvency. Because of your concern about HCFA’s
               preparedness to implement these new authorities and administer its
               programs, you asked us to review HCFA’s management capacity and to
               testify before this Subcommittee last January. You asked us to report
               today on our updated assessment of HCFA’s progress—focusing on the
               agency’s ability to meet its increasing workload in the short term.
               Specifically, you asked us to review HCFA’s progress in (1) addressing its
               most immediate priorities and (2) strengthening its internal management
               to effectively discharge its major implementation and oversight
               responsibilities.

               We relied on our substantial body of past and ongoing work to assess
               HCFA’s performance in meeting its current responsibilities.1 We
               supplemented this work by interviewing 28 agency managers and officials,
               including the Administrator and Deputy Administrator. In addition, we

               1
                See Related GAO Products at the end of this statement.



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conducted small focus groups attended by 46 senior and midlevel
managers and 20 staff, and reviewed agency documents.

In summary, HCFA is facing an unprecedented set of challenges. The
Balanced Budget Act of 1997 (BBA) and the Health Insurance Portability
and Accountability Act of 1996 (HIPAA) were designed, with considerable
input from the administration, to strengthen HCFA’s ability to prevent fraud
and abuse and constrain spending growth in the Medicare program. These
laws added substantial new authorities and programmatic responsibilities
to HCFA’s ongoing management of Medicare and Medicaid. In response to
these mandates and program responsibilities, HCFA’s accomplishments
have been impressive. However, measured against the magnitude of
challenges it faces, HCFA’s progress seems more modest. The immediacy
and resource demands associated with meeting the Year 2000 computer
system challenges—coupled with HCFA’s late start in addressing
them—have put a tremendous burden on the agency this past year and
have affected the timing and quality of its work on many other projects.
For example, it has delayed needed systems modernization and computer
changes that implement new payment systems intended to slow program
cost growth. It has also slowed efforts to improve the oversight of ongoing
operations, such as financial management and Medicare fee-for-service
claims administration, which desperately need attention. Even where HCFA
has made progress—such as in implementing a number of the mandated
HIPAA and BBA requirements—we believe that more work, and many
refinements, are still needed.

HCFA  must meet these challenges with an aging workforce. In fact, almost
one quarter of its staff—most with managerial and technical
experience—will be eligible to retire in the next 5 years. HCFA has taken a
number of steps internally to capitalize on its staff’s strengths to deal with
a rapidly changing health care marketplace and growing responsibilities.
For example, HCFA has developed a strategic plan that better articulates its
future direction, has progressed in its customer-focused reorganization by
moving staff to their new organizational units, and has hired more staff
with needed skills. On the other hand, in focus groups we conducted, HCFA
managers and staff discussed issues that continue to hamper effective
agency operations. For example, HCFA’s reorganization slowed the agency’s
decision-making process so that even travel funds were not allocated until
well into the middle of the fiscal year. Managers also stated that the
performance and awards systems neither motivate staff nor hold staff
accountable for achieving program results.




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             To further strengthen HCFA’s ability to effectively manage its employees
             and programs, the administration has proposed new authorities for
             contracting and new flexibility in hiring in the President’s budget for fiscal
             year 2000. It also proposes new mechanisms to enhance agency
             accountability, with biannual reports to the Congress and an advisory
             board to help the agency streamline internal and program management.
             HCFA senior officials have taken concrete steps to improve agency
             management this year but will need to maintain the momentum over the
             next several years to overcome the agency’s current and future challenges.
             This will be especially difficult in an agency that for years has been
             plagued by external pressures and management problems.


             HCFA, an agency within the Department of Health and Human Services
Background   (HHS), is responsible for administering much of the federal government’s
             multibillion-dollar investment in health care—primarily the Medicare and
             Medicaid programs. Rapid increases in Medicare program costs, coupled
             with increasing concern about fraud and abuse in the program, led the
             Congress to enact legislation—HIPAA and the BBA—to strengthen Medicare.
             HIPAA established the Medicare Integrity Program, which ensures increased
             funding for Medicare program safeguard efforts and authorizes HCFA to
             hire specialized antifraud contractors. The BBA made the most significant
             changes to Medicare in decades, designed to reduce the growth of
             Medicare spending. The law requires HCFA to implement new payment
             methodologies, expand managed care options, and strengthen program
             integrity activities. At the same time, these laws also added entirely new
             responsibilities—such as oversight of private health insurance and
             implementation of a new state children’s health insurance program—to
             HCFA’s historic mission to administer Medicare and Medicaid.


             Medicare is the nation’s largest health insurance program, covering about
             39 million elderly and disabled beneficiaries at a cost of more than $193
             billion. Most of these beneficiaries receive health care on a fee-for-service
             basis, in which providers are reimbursed for each covered service they
             deliver to beneficiaries. HCFA contracts with about 60 insurance companies
             to process the high volume of fee-for-service claims—numbering about
             900 million in fiscal year 1997—submitted by about a million health care
             providers for payment. Medicare’s managed care program, the other
             principal component, covers the growing number of beneficiaries who
             have chosen to enroll in prepaid health plans, where a single monthly
             payment covers any needed services. About 6.8 million people—about




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                          17 percent of all Medicare beneficiaries—were enrolled in more than 450
                          managed care plans as of December 1, 1998.

                          Medicaid, a $177 billion federal and state grant-in-aid entitlement program
                          administered by states, finances health care for about 36 million
                          low-income families and blind, disabled, and elderly people. At the state
                          level, Medicaid operates as a health insurance program covering
                          acute-care services for most recipients, financing long-term medical care
                          and social services for elderly and disabled people, and funding programs
                          for people with developmental disabilities and mental illnesses. In
                          addition, the BBA created the state-operated Children’s Health Insurance
                          Program, which provides federal grants to states to provide basic health
                          insurance coverage for low-income, uninsured children. Through this
                          program, states have a choice of either expanding their Medicaid programs
                          or developing a separate program to insure children.

                          Under HIPAA, HCFA also has a completely new responsibility for ensuring
                          that private health insurance plans comply with federal standards. In five
                          states that did not pass legislation conforming to key provisions of HIPAA,
                          HCFA has direct responsibility for enforcing HIPAA standards for individual
                          and group insurance plans. In addition, HIPAA, along with the BBA, provides
                          HCFA more opportunities to improve its fraud and abuse identification and
                          prevention programs in Medicare.

                          HCFA had about 4,100 staff as of October 1998. About 65 percent were
                          located in the central office and the remainder worked in the agency’s 10
                          regional offices. In addition to its workforce, HCFA oversees Medicare
                          claims administration contractors who employed an estimated 22,000
                          people in fiscal year 1997.


                          Last year, we told you that substantial program growth and greater
HCFA Has Made Some        responsibilities appeared to be outstripping HCFA’s capacity to manage its
Progress Addressing       existing workload. Today, the message is a more complicated one. HCFA
Its Highest Priorities,   has made great strides in addressing many of its immediate
                          priorities—including readying critical computer systems for the year 2000
but Many Problems         and implementing many provisions of HIPAA and the BBA. But the number
Remain                    and complexity of the BBA’s requirements and the urgency of systems
                          changes, coupled with a backlog of decades-old problems associated with
                          HCFA’s routine operations, make it clear that much more needs to be
                          accomplished.




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HCFA Made a Concerted         Over the past year, HCFA has made a concerted effort to deal with its most
Effort on Y2K, but Critical   pressing priority—the Year 2000 computer systems problem—commonly
Tasks Are Incomplete          referred to as Y2K.2 If uncorrected, Y2K problems could cause computer
                              systems that run HCFA’s programs to shut down or malfunction, resulting in
                              serious disruptions to payments to Medicare providers and services to
                              Medicare beneficiaries. Addressing Y2K is a formidable task for HCFA,
                              because the Medicare program uses 6 standard claims processing systems,
                              about 60 private contractors, and financial institutions nationwide to
                              process about 900 million Medicare claims each year for about 1 million
                              hospitals, physicians, and medical equipment suppliers.

                              In September 1998, we reported that time was running out for HCFA to
                              modify Medicare systems to handle Y2K.3 HCFA was severely behind
                              schedule in repairing and testing its systems and in developing
                              contingency plans to handle system failures. Until 1997, HCFA was
                              attempting to develop the Medicare Transaction System—which would be
                              Y2K compliant—to replace its existing Medicare claims processing systems.
                              But the project was halted because of design problems and cost overruns.
                              This left HCFA with multiple, noncompliant Medicare claims processing
                              systems that needed modernization. Compounding this difficult task was
                              HCFA’s failure to adequately direct and monitor its Y2K project. We
                              recommended changes to better manage its Y2K efforts, and HCFA agreed to
                              implement our recommendations as soon as possible.

                              HCFA  recently reported to HHS that as of December 31, 1998, it had
                              completed renovating 5 of the 6 standard systems used by its contractors
                              to pay claims and all 25 of its mission-critical internal systems. We are now
                              monitoring HCFA’s progress in implementing the recommendations in our
                              September 1998 report, and we are reviewing the agency’s progress in
                              addressing the critical areas of Y2K testing and business continuity and
                              contingency planning. We will testify on these issues to the Congress in
                              the next few weeks. Furthermore, although HCFA is not directly responsible
                              for state Medicaid enrollment and payment systems, agency officials said
                              they are concerned that some state systems may fail. To help prevent this,
                              the agency has begun to work with states on their Y2K problems.

                              HCFA’sprogress on the Y2K front is tempered by one unfortunate reality:
                              some of the systems HCFA is expending so much energy and resources to

                              2
                               This problem stems from the use in many computer systems of a two-digit dating system for
                              indicating the year. With this abbreviated format, the year 2000 is indistinguishable from 1900.
                              3
                               Medicare Computer Systems: Year 2000 Challenges Put Benefits and Services in Jeopardy
                              (GAO/AIMD-98-284, Sept. 28, 1998).



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                            modify to achieve Y2K compliance are obsolete and will need to be
                            replaced soon after the year 2000. Y2K presented an immediate problem
                            with an inflexible end point, which has forced HCFA to shelve its efforts to
                            consolidate its Medicare claims processing systems and modernize other
                            systems. After the termination of the Medicare Transaction System, HCFA
                            decided to consolidate the number of systems that pay claims to reduce
                            systems maintenance costs and streamline efforts to implement required
                            systems changes. But systems consolidation could not go forward while
                            HCFA and its contractors were renovating and testing their systems for Y2K
                            readiness. As a result, it is spending millions to renovate certain systems
                            for Y2K readiness that it plans to stop using soon after 2000.


HCFA Has Made Some          HCFA  has completed many major tasks this past year and has implemented
Progress but Is Still       significant portions of HIPAA and the BBA, but progress remains slow. For
Struggling With HIPAA and   example, HCFA has taken steps to allocate HIPAA funding and to implement
                            authorities to combat waste and abuse in the Medicare program. HIPAA
BBA Implementation          provided additional funds for HCFA’s Medicare claims processing
                            contractors to use to detect fraudulent and abusive billing practices. The
                            claims administration contractors use these funds to hire and retain staff
                            knowledgeable in conducting provider audits, claims reviews, and
                            payment data analyses, among other activities. HCFA promptly issued the
                            contractors’ fiscal year 1999 budget allocations, unlike the situation in
                            fiscal year 1998, when HCFA did not provide this funding to the contractors
                            until a third of the year had passed.

                            As part of HIPAA, the Congress also gave HCFA the authority to contract with
                            specialists to perform payment safeguard activities. HCFA is now reviewing
                            the submissions it received in response to its September 1998 solicitation
                            for bids to become a program safeguard contractor. Such a contract could
                            be awarded by May 1999, but the scope will be limited and will not provide
                            many of the benefits initially envisioned from using a specialty contractor.

                            As part of its work on BBA-mandated Medicare+Choice,4 HCFA issued
                            interim final regulations for health maintenance organizations and other
                            types of managed care organizations (for example, preferred provider
                            organizations and provider-sponsored organizations) to participate and


                            4
                             Medicare+Choice widens beneficiary and health plan participation in Medicare managed care by
                            (1) guaranteeing plans a minimum payment level, intended to encourage plans to locate in areas they
                            had previously not served; (2) expanding the types of plans eligible to contract with Medicare to
                            include—in addition to health maintenance organizations—preferred provider organizations and
                            provider-sponsored organizations; and (3) informing beneficiaries of the plan choices in their area
                            through a national information campaign.



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took several steps toward implementing the new National Medicare
Education Program last year. The regulations, published in June 1998,
represented a massive undertaking accomplished within a very short time
period. In rushing to reach the deadline, however, some of the provisions
were developed without full consideration of their impact on managed
care organizations. For example, the regulations required that managed
care plans assess the health status of all new Medicare members within 90
days of enrollment, but this requirement would include existing plan
members for whom the plan may already have comprehensive
information. Similarly, the regulations require each managed care
organization’s chief executive officer to certify that the encounter data
provided to HCFA are 100-percent accurate. To managed care plans, such a
standard seems unreasonable because these data are generated from many
sources not directly under their control, including contracting physicians,
hospitals, and other providers. In addition, managed care plans are
concerned that other requirements cannot realistically be accomplished in
the required time frames, may be duplicative of existing accreditation and
reporting requirements, and could create disincentives to work on more
difficult quality improvement projects. HCFA has agreed to reconsider a
number of items and is planning to change the standard for data accuracy
so that plans’ chief executive officers will certify to the best of their
knowledge that the data provided to HCFA are accurate.

For the new National Medicare Education Program, HCFA established an
eight-point plan for educating beneficiaries about their new managed care
options; implemented an Internet site for providing comparative managed
care plan information; and has begun phasing in its toll-free call center and
its mail-out of a revised Medicare handbook to beneficiaries in five states,
which foreshadowed the nationwide mail campaign planned for this fall.
The effort to produce Medicare handbooks was more complicated than
the agency originally expected. Of the 15 comparative handbooks mailed
to beneficiaries in different geographic areas, 12 were inaccurate because
HCFA published them before managed care plans finalized their Medicare
participation decisions. The Congress’ efforts to encourage the growth of
Medicare managed care could be thwarted if plans refuse to participate
and if beneficiaries are confused, instead of enlightened, about their many
health care choices.

HCFA officials acknowledge they were slow to realize that the complexity
and magnitude of the Y2K problem would stall implementation of key BBA
requirements. The BBA mandated the design and implementation of new
payment methods called prospective payment systems (PPS), which pay



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    providers—regardless of their costs—fixed, predetermined amounts that
    vary according to patient need. To meet BBA targets, HCFA has to design and
    implement four PPS systems:

•   a skilled nursing facility (SNF) PPS by July 1, 1998;
•   a home health agency PPS by October 1, 1999, which was delayed by later
    legislation until October 1, 2000;
•   a hospital outpatient PPS by calendar year 1999; and
•   an inpatient rehabilitation PPS by fiscal year 2001.

    The SNF PPS was implemented on July 1, 1998. However, to prevent
    additional complications during system renovation and testing for Y2K, the
    agency has missed deadlines to make systems changes needed for
    beginning the hospital outpatient and home health agency prospective
    payment systems. These delays could affect both budgetary savings and
    Medicare beneficiaries themselves. The Congressional Budget Office had
    estimated that new payment methods for home health and outpatient
    services would save Medicare about $23 billion between fiscal years 1998
    and 2002. In addition, the hospital outpatient PPS would have reduced the
    amounts elderly patients pay for such services. HHS estimated that between
    January 1999 and April 2000, senior citizens will have to pay an extra
    $570 million in higher copayments over what they would have paid if the
    hospital outpatient PPS had been implemented on time. While many
    Medicare beneficiaries have some sort of third-party coverage for costs
    that Medicare does not cover—referred to as “Medigap” policies—they
    are likely to be indirectly affected because premiums for Medigap policies
    are increasing in line with rising Medicare costs.

    Although HCFA officials were tracking both BBA and Y2K implementation,
    top agency officials did not inform the Congress until July 1998 that the
    agency would be delayed in instituting the new payment methods. HCFA
    officials attributed their late awareness of this problem to communications
    breakdowns at three levels. First, they believe operations and policy staff
    at headquarters responsible for designing the program changes were not
    consulting with each other and with others who were responsible for
    implementing them in the field. Second, they stated that top agency
    officials did not immediately find out what lower-level HCFA managers
    knew—how long it would take to implement complex BBA changes and
    how that could complicate Y2K testing of the systems. Finally, officials
    believe that there was inadequate consultation with Medicare contractors
    responsible for making the actual programming changes to their systems.




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While some parts of the BBA implementation were put on hold, HCFA moved
quickly to implement a new SNF PPS.5 However, we believe that the SNF PPS
has design flaws, and coupled with a lack of adequate planned oversight,
this may diminish the anticipated reduction in Medicare costs that
prospective payment was supposed to create. Savings depend on
developing an appropriate daily payment (per diem) rate to reflect
patients’ needs. The new daily payment rate is based on the average daily
cost of providing all Medicare-covered skilled nursing services, adjusted to
take into account the patient’s condition and expected care needs. We are
concerned that the new SNF PPS’ design preserves the opportunity for
providers to increase their compensation by supplying potentially
unnecessary services, since the amounts paid still depend heavily on the
number of therapy and other services patients receive. Furthermore, HCFA
has not planned sufficient oversight to prevent fraud and abuse. For SNFs,
a facility’s own assessment of its patients will determine whether a patient
is eligible for Medicare coverage and how much will be paid. When Texas
implemented a similar payment method for Medicaid, its on-site reviewers
found that nursing homes’ assessments were often inflated. Despite Texas’
experience, HCFA does not currently have plans to monitor facilities’
assessments to ensure they are appropriate and accurate. Nor has it
ensured that the Medicare contractors—who pay the facilities’
claims—will have timely information on patients to determine whether the
rate to be paid is appropriate.

The last major BBA implementation challenge we want to highlight is the
Children’s Health Insurance Program—the largest health care investment
in children since Medicaid was created in 1965. Although states are given
broad flexibility in tailoring programs to meet their own circumstances,
HCFA is responsible for approving each state’s plan, providing technical
assistance to the states, and ensuring that programs meet statutory
requirements designed to guarantee meaningful health coverage. HCFA has
initiated (1) a comprehensive effort with the states, private companies,
advocacy organizations, the Health Resources and Services
Administration, and others to promote this initiative and (2) an outreach
effort to find those children who are eligible for health insurance under
the Children’s Health Insurance Program or Medicaid but are not enrolled.
Since passage of the act, HCFA has approved 46 state plans, after providing
extensive guidance and interim instructions to states. We are currently

5
 The prior payment method reimbursed providers on the basis of their costs, with capital costs and
ancillary services virtually unlimited. Because providing more services generally triggered higher
payments, facilities had no incentive to provide only necessary services or to improve efficiency.
Prospective payment is intended to slow spending growth by paying providers fixed, predetermined
amounts that vary according to patient need, regardless of providers’ actual costs.



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                           studying HCFA’s and the states’ efforts to implement the Children’s Health
                           Insurance Program and will report on the results later this year.


HCFA’s Handling of         Over the last several years, HCFA has been lax in managing critical ongoing
Ongoing Responsibilities   program responsibilities, such as financial management—particularly by
for Financial Management   Medicare claims administration contractors—and oversight of nursing
                           home compliance. For example, our work on high-risk programs such as
and Routine Oversight      Medicare highlighted the need for major federal financial management
Raises Serious Concerns    reforms, which the Congress initially enacted in the 1990 Chief Financial
                           Officers Act and later expanded in the 1994 Government Management
                           Reform Act. Under this legislation, the 24 major departments and agencies
                           such as HCFA must now produce annual financial statements subject to
                           independent audit, beginning with those for fiscal year 1996.

                           Since 1996, in conjunction with its audit of HCFA’s financial statements, the
                           HHS Office of Inspector General (OIG) has estimated the error rate for
                           improper payments made by Medicare claims administration contractors.
                           For fiscal year 1998, the OIG estimated that about 7 percent of Medicare
                           fee-for-service payments for claims—$12.6 billion—did not comply with
                           Medicare laws and regulations. This represents an improvement over fiscal
                           year 1997, when the OIG estimated that Medicare contractors made
                           $20.3 billion in improper payments—about 11 percent of all claims.
                           However, the difference from 1997 to 1998 was almost entirely attributable
                           to better documentation provided to the auditors, rather than to a
                           substantive reduction in improper payments in categories such as “lack of
                           medical necessity,” “incorrect coding,” and “noncovered services.”

                           HCFA has made progress in strengthening its financial oversight.
                           Nevertheless, serious weaknesses remain for both Medicare and Medicaid.
                           Many of the financial weaknesses in Medicare relate to its oversight of
                           Medicare claims administration contractors, which process over
                           $700 million in Medicare fee-for-service claims each working day. In its
                           audit of HCFA’s 1997 financial statements, HHS’ OIG found material
                           weaknesses in managerial control over contractor operations, and, as a
                           result, HCFA may not be collecting millions of dollars in overpayments from
                           providers. The fiscal year 1997 audit identified one contractor
                           transitioning out of the program that reported transferring $266 million in
                           accounts receivable to other contractors, but neither HCFA nor the auditors
                           could determine whether these receivables had been transferred onto the
                           new contractors’ books. HCFA depends on contractors’ financial reports to
                           provide information for its financial statement because HCFA lacks an



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integrated accounting system that can capture financial information at the
contractor level. Moreover, the OIG found indications that HCFA’s central
and regional office oversight of operational and financial management
controls was inadequate to ensure that contractor-provided financial
information was consistent and accurate.

Similarly, the OIG found that security for contractor and HCFA information
systems was inadequate, imperiling the confidentiality of Medicare
beneficiary personal and medical data. While HCFA had corrected some
weaknesses found during the audit for fiscal year 1996, it was still possible
for an unauthorized user to gain access to HCFA’s database and modify
sensitive beneficiary files. HCFA has recognized the need to protect the
security of its information systems and, starting in 1997, began revising
security policy and guidance, and implementing corrective action plans.
Because of the need to focus on Y2K modifications, however, HCFA probably
will not address many of these weaknesses in the near term.

Medicaid financial management also is in need of reform. The OIG’s 1997
audit revealed that HCFA had limited information on the federal portion of
Medicaid accounts receivable and payable. In fiscal year 1997, HCFA relied
on survey information from the states to estimate the amounts to record in
the financial statements, and because the survey data were so limited, the
OIG could not verify their accuracy. In addition, the audit noted that HCFA
regional offices were not providing sufficient oversight of states’ Medicaid
claims processing and reporting, including states’ efforts to deter fraud
and abuse and collect overpayments.

HCFA’s oversight of the quality of care Medicare and Medicaid beneficiaries
receive also needs improvement. HCFA is responsible for defining
requirements for certain providers, such as nursing homes and home
health agencies, to participate in the Medicare and Medicaid programs and
certify that their enforcement is adequate to protect the health and safety
of Medicare and Medicaid beneficiaries. HCFA contracts with state agencies
to review nursing homes and home health agencies for their adherence to
these federal requirements. Our work has shown that HCFA’s policies and
oversight have been insufficient to ensure quality of care for nursing home
residents or home health patients, and serious problems have resulted.
One in nine nursing homes in the country were cited in both of the last two
inspections for harming residents or putting residents’ health and safety in
immediate jeopardy—but such homes often faced no federal sanctions. In
response, HCFA began taking actions to improve state inspection practices,
revise state oversight activities, and strengthen enforcement for nursing



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                       homes. HCFA has also added requirements that home health agencies
                       demonstrate experience and expertise in home care by serving a minimum
                       number of patients before initially certifying them as Medicare providers.
                       However, these steps may not go far enough to protect vulnerable
                       beneficiaries. We are now reviewing HCFA’s oversight of state nursing
                       home complaint investigations and inspections and will report to the
                       Congress on these issues this year.


                       Because its mission has been rapidly growing and changing, HCFA officials
HCFA Has Made          have worked hard to strengthen the agency’s management capabilities.
Changes to Enhance     Despite these efforts, problems remain that hamper effective agency
Its Management         operations. While HCFA has developed a new focus on planning, including
                       publishing a strategic plan, it does not require units to develop detailed
Capacity, but          plans to carry out day-to-day operations. The agency has completed its
Problems Persist       reorganization, but the resulting structure has contributed to various
                       communication and coordination problems. Last year, HCFA lacked
                       sufficient trained staff with the skills to effectively implement its top
                       priorities. It hired more staff with needed skills in 1998, but it has not
                       completed a long-term strategic approach to meet its future human
                       resource needs. HCFA staff and managers are also concerned that its
                       performance and award systems are not well linked to accomplishing its
                       mission and that many managers are overburdened and lack managerial
                       skills. These types of problems are found in other agencies, but HCFA still
                       must be diligent in addressing them. The President’s budget for fiscal year
                       2000 proposes a reform initiative for HCFA that is designed to increase its
                       flexibility in the human resources area and to increase the agency’s
                       accountability.


Tactical Planning Is   In December 1998, HCFA published its strategic plan, which focused on the
Limited                organization as a whole and communicated the agency’s vision, mission,
                       and broad approaches to realizing that vision. This plan was developed to
                       help HHS respond to requirements in the Government Performance and
                       Results Act of 1993. In its strategic plan, HCFA clearly states that serving
                       beneficiaries is its primary mission and, in doing so, the agency must be a
                       prudent purchaser of health care. In addition to its overarching strategic
                       plan, HCFA has also produced draft strategic plans for such significant
                       areas as information technology and program integrity.

                       Strategic plans are an important first step; to be useful, however, they
                       must be implemented. Tactical plans, which identify specific, measurable,



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                       desired outcomes; time frames; and assignments of responsibilities for
                       task completion, are critical. Last year, we reported that HCFA was not
                       planning its activities on a tactical level. Although tactical planning has
                       been used in some specific instances during the past year, such as to help
                       track implementation of BBA requirements, HCFA has still not
                       institutionalized this level of planning in its day-to-day operations.

                       In our interviews and focus groups, a pervasive theme was the need to
                       work in a crisis mode, made worse by a lack of planning. For example, a
                       staff member stated that she was being pulled from one “hot project” to
                       another—which caused her to lose efficiency because she barely managed
                       to master one subject before she was tasked with another. A manager told
                       us that since the reorganization, little planning has taken place in his
                       division, making even simple tasks harder. He said, as an example, that the
                       divisions did not know how much travel money was available until the
                       middle of the fiscal year and that routine trips had to be written up as
                       emergencies to get approval. We heard similar concerns from managers
                       and staff working on data systems and coverage policy.


Reorganization Has     HCFA’s July 1997 reorganization established a totally new structure
Created Coordination   designed to better focus the agency as a “beneficiary-centered purchaser”
Problems               of health care. The reorganization created new centers that were intended
                       to respond directly to HCFA’s customers—the Center for Beneficiary
                       Services, the Center for Health Plans and Providers, and the Center for
                       Medicaid and State Operations—and to provide additional resources to
                       Medicare’s growing managed care program.

                       In our January 1998 testimony, we noted that the agency’s staff had not yet
                       moved to the actual location of their new organizational units, which
                       tended to exacerbate problems with internal communication and
                       coordination. Almost a year after the reorganization, between June and
                       August 1998, HCFA completed the physical relocations, placing staff within
                       their new organizational units. Relocation was a major undertaking
                       because HCFA had made dramatic shifts of groups and people. An
                       estimated 80 percent of HCFA central office staff, along with their
                       computers, files, and shared office equipment, were relocated during the
                       move. Managers told us that the physical move was implemented well,
                       minimized work disruptions, and enhanced HCFA’s operational efficiencies.

                       The 1997 reorganization set out to eliminate HCFA’s “stovepipes” by
                       placing policy and operations staff together in specific customer-focused



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                             centers to enable them to work more closely together. We found that HCFA
                             is still in the process of learning how to make its new organization work.
                             Several managers said that they believe the quality of decision-making will
                             be enhanced because input from many individuals and groups is required.
                             But other managers and staff reported substantial internal and external
                             communication problems as a result of the reorganization. For example,
                             they said that the organization’s decision-making process has become slow
                             and cumbersome because it is more difficult to identify the key
                             decisionmakers and find meeting times that can fit their busy schedules.
                             We also were told that even identifying appropriate points of contact is
                             sometimes difficult because new organizational titles are confusing.
                             Finally, some managers and staff were concerned that when accountability
                             for issues was shared by more than one center or office, tasks could “fall
                             through the cracks” unless responsibilities were more clearly defined.
                             Agency officials recognize that coordination is a problem and that there is
                             sometimes a lack of accountability for decision-making. In response, they
                             indicated that they are establishing teams on priority projects where key
                             participants are identified and accountability for project completion is
                             placed on one person.

                             HCFA’s reorganization and emerging role as a health care purchaser and
                             beneficiary advocate have also led to changes in the way HCFA
                             communicates with those outside the agency. Some changes, such as
                             those brought on by the Medicare+Choice program and the availability of
                             Medicare and Medicaid information on the Internet, have increased
                             interaction with providers, provider groups, and beneficiaries, according
                             to several HCFA employees. Some staff we spoke with expressed concern
                             about this increased workload and their inability to readily refer people to
                             appropriate HCFA entities because the new organizational lines of
                             responsibility are still unclear. Also, we found that although the Internet
                             means that HCFA is “open 24 hours a day” and can communicate
                             differently through this new medium, neither senior staff nor agency plans
                             have fully addressed the impact of the Internet on HCFA’s workload and
                             how managers might need to reallocate responsibilities.


Maintaining Experienced      Last year, we reported that HCFA lacked sufficient staff with needed skills
and Appropriate Staff Will   to effectively implement top-priority tasks. Today, managers are somewhat
Continue to Be a             less concerned about staffing shortages because, during the year, HCFA
                             hired more than 400 new employees—a net gain of more than 250 after
Long-Term Need               accounting for attrition. Of the new staff, a little over one-half were hired
                             as GS-7s through GS-12s and about one-third were health insurance



                             Page 14                                                     GAO/T-HEHS-99-58
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                             specialists. Senior agency officials told us that the new staff, with skills in
                             areas such as managed care, private insurance, and market research,
                             should help HCFA meet its new and growing responsibilities.

                             We believe that HCFA’s focus on attracting new employees needs to be long
                             term and continuous because it will continue to lose staff whose expertise
                             must be replaced or supplemented. Over the next 5 years, almost a quarter
                             of HCFA’s staff—who make up a large part of the agency’s management and
                             technical expertise—will be eligible to retire. In addition, managers say
                             HCFA will need staff with “real world” expertise in private industry,
                             including those who know how to purchase care competitively. While HCFA
                             has not fully assessed its long-term human resource needs, senior officials
                             told us that the agency is taking initial steps toward developing a
                             long-term plan for investing in its human resources. HCFA currently has a
                             draft human resources plan that covers the years 1999 through 2003.


Performance System,          HCFA   managers and staff discussed a variety of factors that hamper agency
Awards Program, and          operations and limit effective management. Although we believe that HCFA
Flexible Work Hours Affect   is not unique in experiencing these problems, mitigating them could
                             improve agency performance. These include a pass/fail performance rating
Agency Productivity          system where virtually all staff pass, an awards program that does not
                             necessarily reward superior performance, and flexible work schedules and
                             locations that limit staff availability. Participants in our focus groups
                             believed that HCFA’s performance appraisal system for nonexecutive staff
                             does not allow managers to meaningfully assess and report on staff
                             performance because virtually everyone receives a passing grade. Staff
                             believed that the pass/fail system is demoralizing to hard workers because
                             no adverse action is taken for unsatisfactory performance. Similarly,
                             according to managers and staff, the performance appraisal system does
                             not give staff a sense of satisfaction when they perform well because it
                             fails to recognize outstanding efforts. Some cited the prior performance
                             system as preferable because exceptional performers could benefit by
                             receiving more rapid pay increases.

                             The Administrator found that the performance appraisal system for
                             executives was also not useful in holding managers accountable and made
                             changes this year to better differentiate senior managers’ performance.
                             The executive appraisal system has changed to a system with five levels of
                             performance. Each executive manager has a performance agreement that
                             is linked to performance goals for his or her set of responsibilities.




                             Page 15                                                        GAO/T-HEHS-99-58
HCFA Management: Agency Faces Multiple
Challenges in Managing Its Transition to the
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Many managers and staff members also told us that the current awards
program is not working. Although the program is intended to motivate
staff, the opinions we gathered suggest that it may have just the opposite
effect. Each unit establishes its own panel that makes award decisions and
controls award amounts. Panels consist of an equal number of
union-appointed and management-appointed representatives. Each panel
sets its own criteria for making awards and determining the portion of its
awards budget to give to managers for “on-the-spot” awards, which are
awarded directly to staff for performance on specific projects throughout
the year. Managers told us that they would like to be able to distinguish
among the accomplishments of staff members and reward them
accordingly, but both managers and staff perceive the awards process as
lacking equity and integrity. Any staff member can nominate another for
an award, and we were told that staff members sometimes nominate
themselves and friends nominate each other. Managers also told us that
sometimes almost all nominees in a unit receive awards because panels
find it difficult to distinguish among nominees’ performance. One manager
who served as a panel member said that during the last fiscal year, about
250 employees were nominated for an award in his center—about
two-thirds of all that center’s employees. He said that only five of the
nominees did not get an award. Last fiscal year, panels awarded about
$678,000 to about 2,200 employees in grades 1 through 15—an average of
about $300 per awardee. Managers also directly awarded about $213,000
through on-the-spot awards that can range from $50 to $250.

While staff were highly critical of the performance appraisal and awards
processes, they approved of the flexibility to set their own work hours and
work locations. HCFA’s personnel rules provide for flextime—in which
employees may arrive at work at different times each day within core
periods or work longer hours in a day and earn time off—and
flexiplace—which allows employees to work at alternative locations.
Under these rules, however, staff who work in the office only 4 days a
week may be off when their managers need them to be in the office.
Managers also told us that more time can be taken up with administrative
matters as a result of more flexible work arrangements. They said that
managing staff is more complicated, noting that planning the work,
managing resources, and scheduling meetings is difficult, for instance,
when all of the staff are only required to be in the office during a core
period from Tuesday through Thursday—3 days a week. Employees need
special approval to begin flexiplace, and a senior manager told us that they
are now only approving about half of such applications.




Page 16                                                     GAO/T-HEHS-99-58
                           HCFA Management: Agency Faces Multiple
                           Challenges in Managing Its Transition to the
                           21st Century




Managers and Staff         Some managers and staff discussed their concerns about supervisors’ span
Express Concerns About     of control and the lack of adequate training. They said that they believe
Management Capacity and    some managers are responsible for supervising too many employees and
                           do not have enough time to work with people who could benefit from
Training                   on-the-job training. They also stated that some managers are not skilled at
                           managing people, which they attribute largely to HCFA’s tradition of
                           promoting staff with excellent technical skills to the managerial level, and
                           not rewarding them for developing their staff. Some also cited the lack of
                           training provided to managers to improve their supervisory skills.

                           Many managers and staff agreed that HCFA does not provide enough
                           training opportunities to help them do their work. We were told that new
                           staff get little orientation to the agency’s organization, programs, goals,
                           and mission. Focus group participants added that limited training and
                           travel funds prevented them from attending seminars and receiving
                           training. Each HCFA staff member received an average of 8 hours of
                           training last year. New staff, who generally were hired within the last year,
                           averaged even fewer hours.

                           HCFA’s senior management has identified management and other training
                           as an area where HCFA must improve. The agency is developing a “model
                           management initiative,” which focuses on matching a manager’s
                           competencies with the specific skills that a manager needs for a given
                           position. If approved by the Administrator, this model will be tested in the
                           Office of the Chief of Operations. Then, if the initiative proves effective, it
                           will be implemented in other parts of HCFA. HCFA is identifying better
                           approaches to providing technical training and has doubled its training
                           budget for next year—from about $800,000 in fiscal year 1998 to about
                           $1.6 million in 1999.


HCFA Has New Proposals     To strengthen HCFA’s ability to meet growing responsibilities, the
to Strengthen Management   President’s fiscal year 2000 budget proposes several reform initiatives. The
                           budget seeks more personnel and pay flexibility to allow HCFA to recruit
                           high-level staff with specific, needed skills, such as physicians and
                           executives with managed care plan operational experience. Coupled with
                           such flexibility, HCFA is seeking authority to selectively offer buy-outs to
                           some staff members. In addition, HCFA is seeking new authority that would
                           allow it to contract competitively for its Medicare claims administration
                           contractors. To improve agency performance, HCFA is proposing to add an
                           advisory board of corporate executives and management experts for
                           advice on improving its business practices. Finally, HCFA wants to increase



                           Page 17                                                        GAO/T-HEHS-99-58
              HCFA Management: Agency Faces Multiple
              Challenges in Managing Its Transition to the
              21st Century




              its accountability to the Congress by providing biannual reports on its
              progress.


              As HCFA moves into the 21st century, its challenges will continue to become
Conclusions   more numerous and complex. Once it has finished preparing for Y2K, HCFA
              must face tasks it has had to put aside or has not fully addressed. Several
              immediate challenges lie ahead. HCFA must finish and then refine program
              changes to fully realize the benefits expected from the BBA. It also needs to
              renovate antiquated, and streamline redundant, computer systems.
              Furthermore, it needs to strengthen its financial management and efforts
              to preserve program integrity.

              Added to these responsibilities will be potential additional challenges
              associated with any restructuring of Medicare that follows the
              deliberations of the Bipartisan Commission on the Future of Medicare.
              Even if no major changes are introduced, HCFA’s continuing challenges are
              taxing—strong leadership and management will be required to meet them.
              More effective planning, new staff with needed skills, and better
              accountability could help HCFA address these challenges and better ensure
              quality health care for the elderly, poor, and disabled. A true measure of
              HCFA’s success will be its ability to maintain current momentum as it enters
              the 21st century.


              Mr. Chairman, this concludes my statement. I will be happy to answer any
              questions you or other Members of the Subcommittee may have.




              Page 18                                                      GAO/T-HEHS-99-58
Page 19   GAO/T-HEHS-99-58
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(101782)      Page 20                                                       GAO/T-HEHS-99-58
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