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Improving

Governance andManagement

MAKING MEDICARE RESTRUCTURING WORK

F i n a l R e p o r t o f t h e S t u d y P a n e l o n

M e d i c a r e ’s G o v e r n a n c e a n d M a n a g e m e n t

J u l y 2 0 0 2

Medicare’s

Matching Problems with Solutions

The National Academy of Social Insurance is a nonprofit, nonpartisan organizationmade up of the nation’s leading experts on social insurance. Its mission is to promoteunderstanding and informed policymaking on social insurance and related programs

through research, public education, training, and the open exchange of ideas. Social insurance encompasses broad-based systems for insuring workers and their families against economic insecurity caused by loss of income from work and the cost of health care. NASI’s scope covers social insurance such as Social Security, Medicare, workers’ compensa-tion, unemployment insurance, and related public assistance and private employee benefits.

The Academy convenes steering committees and study panels that are charged with conduct-ing research, issuing findings and, in some cases, reaching recommendations based on theiranalyses. Members of these groups are selected for their recognized expertise and with dueconsideration for the balance of disciplines and perspectives appropriate to the project.

The views expressed in this report do not represent an official position of the NationalAcademy of Social Insurance, which does not take positions on policy issues, or its funders.The report, in accordance with procedures of the Academy, has been reviewed by a committee of the Board for completeness, accuracy, clarity, and objectivity.

The Academy wishes to thank the Robert Wood Johnson Foundation for its generous support of this project.

© 2002 National Academy of Social InsuranceISBN# 1-884902-37-35

Suggested Citation:

King, Kathleen M., Sheila Burke, and Elizabeth Docteur, (eds.), Final Report of the Study Panel onMedicare’s Governance and Management – Matching Problems with Solutions (Washington, DC:National Academy of Social Insurance, July 2002).

J u l y 2 0 0 2

Improving

Governance andManagement

MAKING MEDICARE RESTRUCTURING WORK

Medicare’s

Matching Problems with Solutions

F i n a l R e p o r t o f t h e S t u d y P a n e l o n

M e d i c a r e ’s G o v e r n a n c e a n d M a n a g e m e n t

Stuart ButlerThe Heritage FoundationWashington, DC

Nancy DapperConsultantSeattle, WA

John DonahueJFK School of GovernmentCambridge, MA

Julia Ann JamesHealth Policy Alternatives, Inc.Washington, DC

Theodore MarmorYale UniversityNew Haven, CT

Ralph MullerUniversity of Chicago Hospitals and Health SystemsChicago, IL

Tom OliverJohns Hopkins School of Public HealthBaltimore, MD

Sallyanne PaytonUniversity of Michigan Law SchoolAnn Arbor, MI

Thomas ReardonPast President – AMABoring, OR

Leonard SchaefferWellPoint Health Networks, Inc.Thousand Oaks, CA

Thomas StantonAttorney at LawWashington, DC

Beth StevensMathematica Policy Research, Inc.Princeton, NJ

Gail WilenskyProject HOPEBethesda, MD

National Academy of Social Insurance Study Panel on Medicare’s

Governance and ManagementSheila Burke, Chair

Smithsonian InstitutionWashington, DC

The views expressed in this report are of those of the Study Panel Members and do not necessarily reflect those of the organizations with which they are affiliated.

Kathleen M. KingStudy Director and

Director of Health Security Policy

Virginia RenoVice President for Research

Kimberly A. O’ConnellResearch Assistant

The Academy also wishes to acknowledge the contributions of former staff members:Elizabeth Docteur, who served as Study Director and Director of Health Policy Studies

through November 2001; Michael E. Gluck, who served as Study Director and Scholar-in-Residence through March 2001; Jill Bernstein, who served as Director of Health

Policy Studies through February 2001; and David Blabey, who served as Research Assistant through February 2001.

Contractors

Project Staff

Peter FoxPDF, LLC

Chevy Chase, MD

Jonathan OberlanderUniversity of North Carolina

Chapel Hill, NC

Thomas StantonAttorney at LawWashington, DC

Edward SteinhouseMuse and Associates

Washington, DC

v

Acknowledgements

The National Academy of Social Insurance and its Study Panel on Medicare Governanceand Management gratefully acknowledge the assistance of the following individuals in complet-ing this report. Many staff members of the Centers for Medicare and Medicaid Services provid-ed information and data for this report. Thomas Kickham provided invaluable assistancethroughout the project. Without CMS’ assistance, completion of this report would not havebeen possible. Staff from the General Accounting Office were also extremely helpful. Any errorswithin remain those of the authors.

Henry AaronBrookings Institution

Hon. Senator BreauxUnited States Congress

LeShawn Burrell-JonesSmithsonian Institution

Kathleen ButoJohnson and Johnson

David ColbyRobert Wood Johnson

Foundation

Barbara CooperInstitute for Medicare

Practice

Margaret CrenshawOffice of Strategic Planning,

U.S. Postal Service

Elizabeth CusickCenters for Medicare and

Medicaid Services

Nancy DelewCenters for Medicare and

Medicaid Services

Jack EbelerAlliance for Community

Health Plans

Walton J. FrancisIndependent Consultant

Howard GlennersterLondon School of

Economics

Michael HashHealth Policy Alternatives

Timothy HillCenters for Medicare and

Medicaid Services

Candy KaneOffice of Student FinancialAssistance Programs, U.S.Department of Education

Thomas KickhamCenters for Medicare and

Medicaid Services

Mark MillerCongressional Budget Office

Nancy-Ann Min DeParleIndependent Consultant

Ronald MoeCongressional Research

Services

Nancy O’ConnorCenters for Medicare and

Medicaid Services

Mark PaulyUniversity of Pennsylvania

Elaine RaubachCenters for Medicare and

Medicaid Services

Robert ReischauerThe Urban Institute

Jane RossNational Research Council

Bill ScanlonUnited States General

Accounting Office

Thomas ScullyCenters for Medicare and

Medicaid Services

Bruce VladeckInstitute for Medicare

Practice

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Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Overview of Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

Administrative History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

Growth of Responsibilities Since 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

Management Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8Resources not Commensurate with Responsibilities . . . . . . . . . . . . . . . . . . . . . .8Congressional Micromanagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9Inability to Implement Laws on Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9Oversight of Contractors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10Information Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11Fraud and Abuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11Communications with Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12Leadership and Staffing Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Alternative Governance Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

Chapter 1: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17

The Context for Considering Changes in Medicare’s Governance and Administration . . . . . . . . . . . . . . . . . . . . . . . . . . .17

The Study Panel Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

A Framework for Evaluating Medicare’s Governance and Management . . . . . .19

Criteria for Evaluating Medicare’s Governance and Management . . . . . . . . . . .19

Guidelines for Applying the Criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Chapter 2: An Overview of Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

Medicare’s Contributions to the Health of the Elderly and Disabled . . . . . . . . .21

Medicare’s Administrative History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

Medicare’s Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

Department of Health and Human Services . . . . . . . . . . . . . . . . . . . . . . . . . .26Congress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26Other Advisory or Oversight Agencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Responsibilities of CMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28

Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28Responsibilities not related to Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

Growth of Responsibilities Since 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

The Health Insurance Portability and Accountability Act (HIPAA) of 1996 . . . . .29The Balanced Budget Act of 1997 (BBA) . . . . . . . . . . . . . . . . . . . . . . . . . . . .30The Balanced Budget Refinement Act of 1999 (BBRA) . . . . . . . . . . . . . . . . . . .32The Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA) . . . . . . . . . . . . . . . . . . . . . . .33

Chapter 3: Issues in Medicare Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

Some General Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

Resources not Commensurate with Responsibilities . . . . . . . . . . . . . . . . . . . . .36

Congressional Micromanagement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

The Budget Reconciliation Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41Other Reasons for Increased Specificity in Law . . . . . . . . . . . . . . . . . . . . . . . .41

Inability to Implement Laws on Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42

Poor Oversight of Contractors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

Outdated Information Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .46

Fraud and Abuse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

The False Claims Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50Inconsistent and Burdensome Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . .50Claims Reviews and Sampling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51

Communications with Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

The National Medicare Education Program . . . . . . . . . . . . . . . . . . . . . . . . . .54

Lack of Continuity in Leadership and Staffing Issues . . . . . . . . . . . . . . . . . . . . .56

Tenure of the Administrator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56Insufficient Number of Senior Managers and Impending Retirements . . . . . . . . .57Inappropriate Skills and Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57

Chapter 4: Consideration of Other Governance Structures . . . . . . . . . . . . . . . . . . . .61

The Independent Agency Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61

The Independent Board Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63

The Performance-Based Organization Model . . . . . . . . . . . . . . . . . . . . . . . . . .64

The Government Corporation Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65

Evaluation of Alternative Governance Models . . . . . . . . . . . . . . . . . . . . . . . . .66

Chapter 5: Conclusions and Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . .69

Capacity Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70

Accountability and Responsiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73

Credibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75

References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77

1I m p r o v i n g M e d i c a r e ’ s G o v e r n a n c e a n d M a n a g e m e n t

The National Academy of Social Insurance(NASI) convened a study panel in 2000 onMedicare governance and management aspart of its project to examine key issues poli-cymakers face in preparing Medicare for thefuture. Members of the study panel wereselected for their recognized expertise andexperience with Medicare and public admin-istration. Their views do not represent theofficial position of NASI, which does nottake positions on policy issues.

The study panel had two tasks: examiningwhether a different governance structuremight help the federal agency that runsMedicare, the Centers for Medicare andMedicaid Services (CMS), be more effectiveand identifying ways in which currentMedicare management could be improved.In part because some panel members had dif-ferent views on whether Medicare should berestructured, the panel concentrated its focuson making the current Medicare programwork better.

In its work, the panel was struck byMedicare’s size, scope, and complexity andits importance to beneficiaries, the federalgovernment, the health care system, and thenational economy. Virtually the entire popu-lation over age 65 (97 percent) is insured byMedicare, as well as 5 million people withdisabilities. The program is enormouslyimportant to both the economic security andhealth status of elderly Americans, and alsoplays a substantial role in improving thehealth care system. Before Medicare, nearly

one-third of senior citizens were poor andmore than 50 percent paid their health carecosts out of pocket. Today, the proportion ofseniors living in poverty mirrors the youngerpopulation—about 10 percent. Medicare hasdramatically increased access to health care,particularly for minorities, and has con-tributed to significant increases in lifeexpectancy for the elderly. In 2001, Medicarespending was estimated at $238.2 billion andaccounted for 19.3 percent of nationalspending for personal health care and for11.7 percent of all federal spending (CMS2002a). More than 6,000 hospitals; 41,800health plans, long-term care facilities, andother providers; 861,800 physicians andother practitioners; and 168,300 clinical lab-oratories participate in Medicare. Its size,breadth, and complexity make the task ofadministering it exceptionally difficult. Whilethe study panel identified a number of weak-nesses in current program management, itwants to emphasize that Medicare has been,and continues to be, a very successful pro-gram and its shortcomings should be con-strued as opportunities for improvement,rather than indications of failure.

GOVERNANCE

The study panel examined four differentmodels of governance as possible alternativesto the current structure: an agency that isindependent of the Department of Healthand Human Services (HHS), a multimemberboard, a performance-based organization,and a government corporation.1 In order to

Introduction

I m p r o v i n g M e d i c a r e ’ s G o v e r n a n c e a n d M a n a g e m e n t 1

1 In some proposals, the board would be independent of the executive branch, while other proposals wouldplace the board inside HHS.

recommend a different governance structure,the panel would have to judge it clearly supe-rior to the current structure for the long-term. Based on these considerations, thestudy panel did not reach consensus that thecurrent governance structure is fatally flawedor that one of the alternative models shouldbe adopted in its purest form. It did, howev-er, think that further consideration of theindependent agency model, as typified by theSocial Security Administration (SSA), is mer-ited. Thus far, no comprehensive evaluationof SSA’s move from an operating agency inthe Department of Health and HumanServices (HHS) to an independent agencyhas been undertaken. However, some mem-bers believed that an independent agencycould be detrimental to Medicare becauseCMS would lose the support and protectionof a cabinet official.

Some panel members think that the boardmodel merited further consideration. In theirview, an independent board could improvecapacity and flexibility, particularly if theboard were independent of any executiveagency. Others argue that Congress wouldnot be able to hold a board accountable forsound decision-making, and that a programas large and critical as Medicare must bedirectly accountable to the Congress and thePresident.

The two other models were not judged to beviable alternatives for Medicare. The panelthinks, however, that some variant of theindependent agency or board models mightbe worthy of further consideration, althoughthis was beyond the scope of their work.

MANAGEMENT

The study panel identified a number of criti-cisms regarding the management ofMedicare, including: insufficient resources tofulfill the responsibilities Congress has givenit, an inability to implement laws on a timelybasis, Congressional micromanagement,inadequate oversight of contractors, outdatedinformation systems, inadequate communica-tions with beneficiaries, a sometimes heavy-handed approach to fraud and abuseprevention and detection, and an inability torecruit and retain qualified staff. In the studypanel’s view, many of CMS’ managementproblems stem from two factors: a pervasiveand persistent shortage of resources to meetthe greatly increased responsibilities Congresshas given it and the extent of Congressionalinvolvement in the management of Medicare.In recent years, Congress has enactedincreasingly specific laws that limit theagency’s flexibility in administering the pro-gram, and also has become much moreinvolved in overseeing ongoing management.

Over three years ago, a distinguished panel ofhealth policy and management experts wrotean open letter to Congress and the Executivethat called upon Congress and the adminis-tration to “provide the agency the resourcesand the administrative flexibility necessary tocarry out its mammoth assignment…”(Butler 1999). Since that time, the agencyhas not received substantially more resourcesand has faced increasingly harsh criticism forfailing to meet all the demands placed on it.Unless the resource issue is addressed in thenear future, without waiting for Congress todecide whether or how to restructureMedicare, the study panel fears that inade-

2 N a t i o n a l A c a d e m y o f S o c i a l I n s u r a n c e


quate resources will begin to erode CMS’ability to keep the program operating at thelevel upon which beneficiaries and providersdepend. Therefore, the panel recommendsthat Congress act now to increase resourcesto CMS so that they are commen-surate with the responsibilitieswith which CMS is entrusted. Thestudy panel also recommends thatCongress consider removing fromCMS some responsibilities notdirectly related to Medicare andMedicaid, such as oversight of theClinical Laboratory ImprovementAct (CLIA) and responsibility forthe Health Insurance Portabilityand Accountability Act (HIPAA).Concentrating the agency’s focuson its central missions should assist CMS inbetter meeting its core responsibilities.Greater resources should allow CMS to pro-vide contractors with the resources they needto function and to exercise proper adminis-trative oversight. It should also allow theagency to recruit and retain staff with theappropriate expertise to manage such a com-plex program and to design and implementinformation systems adequate to that task.

While the study panel believes that Congres-sional oversight of Medicare is crucial, givenits share of the federal budget and its impor-tance to beneficiaries and the health care sys-

tem, it thinks that both the number and thehighly specific content of laws passed inrecent years have severely taxed the agency’sability to comply with the requirementsimposed on it. In addition to enacting

detailed legislation, Congress isalso very involved in agency mat-ters on an ongoing basis.Congressional committees,including not just authorizing andappropriating committees, butalso oversight committees, haveheld scores of hearings, whichrequire significant preparation onthe part of administration witness-es. Congress has also requested agreat many GAO reports onMedicare, to which the agency

typically issues a formal response. Moreover,the volume of telephone calls and letters tothe agency from members of Congress hasincreased over time; responding to them on atimely basis has proved to be a significantchallenge for the agency.

In the panel’s view, the agency would benefitfrom some respite in implementing new lawsand from greater administrative flexibility.Perhaps even more importantly, the studypanel believes that both Congress and CMSwould benefit from a greater sense of trustand comity, and urges a public dialogue onhow that might be accomplished.

…the agencywould benefit

from some respitein implementingnew laws andfrom greater

administrativeflexibility.


In 2000, the National Academy of SocialInsurance (NASI) convened a study panel onMedicare governance and management aspart of its project to examine key issues poli-cymakers face in preparing Medicare for theinflux of the baby boom generation. Thestudy panel met seven times to examine theissue, and this is their final report.

In its work, the panel used three criteria to evaluate Medicare’s governance and management:

■ Does it have the capacity to accomplishits functions – including the resources(financial, human, technological, andorganizational) to fulfill the responsibili-ties Congress has given it? Does it havethe technical expertise it needs? Does ithave the flexibility needed to adapt tochanges in the environment in which itoperates, or is it too constrained byCongressional directives?

■ Is it accountable for the decisions itmakes? How is oversight furnished? Isit responsive to the beneficiaries it servesand stakeholders?

■ Is the Medicare program administrationviewed as credible?

The study panel began its work with animportant premise. It evaluated Medicare’scurrent governance and management, with-out making assumptions about ways in whichMedicare might be restructured. Its recom-mendations are designed to make the currentMedicare program work better, not tochange the governance or management toaccommodate a restructured Medicare program.

OVERVIEW OF MEDICARE

In order to inform its work, the panel exam-ined Medicare’s history, mission, responsibili-ties, and current operations. Medicare is thesecond largest domestic social program; itprovides health insurance to more than 39million individuals, including more than 5million disabled people and almost allAmericans over age 65. Since its inception,Medicare has made enormous contributionsto the health and economic status of theelderly and to the U.S. health care system.Medicare is responsible for enforcing healthand safety standards in hospitals, nursinghomes, and other health care facilities. It alsomakes direct financial contributions to thetraining of new physicians and other healthcare providers.

Over time, Congress has expandedMedicare’s scope, mission, and responsibili-ties substantially. For example, Congressincluded disabled people and those with endstage renal disease (ESRD) in Medicare in1972. In 1985, it established direct subsidypayments to hospitals that serve a dispropor-tionate share of low-income and uninsuredpeople. These payments are not linked toproviding care for Medicare beneficiaries, butserve a broader social goal of providing afinancial safety net for vulnerable hospitals.

Over the years, Congress has attempted toredress deficiencies in the health care systemand improve the quality of health carethrough greater federal oversight and regula-tion. In many instances, these responsibilitieswere assigned to the Health Care FinancingAdministration (HCFA, now called theCenters for Medicare and Medicaid Services

Executive Summary

(CMS)), the federal agency responsible foradministering Medicare.2 Examples include:regulation of Medicare supplemental(Medigap) insurance, oversight of clinicallaboratories, oversight of private health insur-ance, responsibility for administrative simplifi-cation of health care transactions, andresponsibility (with the states) for the StateChild Health Insurance Program.

Today, Medicare is a vastly more complexand larger program than envisioned at itsenactment. Some of the increased complexitystems from the additional responsibilitiesCongress has given it over the years, butunprecedented advances in technology andmedical science have also greatly complicatedthe administration of Medicare. Takentogether, all these actions have combined tomake Medicare a formidable presence inboth the nation’s health care delivery systemand the federal budget. In FY 2001,Medicare spending was estimated at $238billion, accounting for 11.7 percent of allfederal spending.

ADMINISTRATIVE HISTORY

The way that Medicare was designed in 1965continues to have important implicationseven today. Congress established Medicare asan entitlement program, which means that allthose who meet the eligibility criteria estab-lished in law are eligible to receive Medicarebenefits, without regard to the annual appro-priation of funds from Congress.

In 1965, Congress put Medicare’s operationslargely in the hands of private insurers toavoid federal intrusion into the practice of

medicine. Under contract to the federal gov-ernment, private insurers continue to per-form many functions, including processingclaims, reimbursing providers for services,performing audits, and reviewing claims todetermine medical necessity. Today, 48 insur-ers have contracts with Medicare, 28 for PartA and 20 for Part B.

Medicare was administered by a bureau ofthe Social Security Administration (SSA)until 1977, when HCFA was created as anew agency in the Department of Health,Education and Welfare (now Health andHuman Services (HHS)). HCFA was givenresponsibility for administering both theMedicare and Medicaid programs.

GOVERNANCE

Multiple Congressional committees havejurisdiction over Medicare: the HouseCommittee on Ways and Means, the HouseCommittee on Energy and Commerce, andthe Senate Committee on Finance. Thesecommittees are considered the authorizingcommittees, and are responsible for legisla-tive oversight, which includes holding hear-ings and proposing changes to Medicareeligibility, benefits, payment, and coverage.The Appropriations Committees in theHouse and the Senate are responsible forappropriating funds for the administration ofMedicare. Although Medicare’s situation isno different from many other federal pro-grams, the fact that the authorizing commit-tees control the program, while theappropriating committees control the fundsto administer the program, causes a mis-match between responsibilities and resources

2 The name of the agency that runs Medicare was changed from the Health Care Financing Administration(HCFA) to the Centers for Medicare and Medicaid Services (CMS) in 2001. In this report, the agency is referred to as either HCFA or CMS, depending on the date.


to fulfill those responsibilities. The Houseand Senate Budget Committees also have arole in Medicare. Through an annual budgetresolution, they recommend the overall levelof Medicare spending for the following year.In crafting the budget resolution, the BudgetCommittees may influence substantiveMedicare policy. Other committees in boththe House and Senate, including the SenateSpecial Committee on Aging, the OversightSubcommittee of the House Committee onCommerce, and the Small BusinessAdministration Committee and theGovernment Reform Committee in theHouse, are involved in Medicare oversight,but have no authority to legislate withrespect to Medicare. The GeneralAccounting Office (GAO), under Congress’direction, is also very involved in Medicareoversight.

In the executive branch, CMS is an operatingagency of HHS whose administrator reportsdirectly to the Secretary of HHS. The Officeof the Inspector General (OIG) in HHS alsohas a very strong role in Medicare oversight,and some independent authority on fraudand abuse matters. As a practical matter,other divisions in HHS are frequentlyinvolved in reviewing and approving pro-posed CMS actions. For example, they typi-cally review and approve proposedregulations and other significant actions.While some maintain that the oversight theseother HHS agencies furnish is invaluable,others argue that their involvement just addslayers of bureaucracy and unnecessarily slowsdown the agency’s actions.

GROWTH IN RESPONSIBILITIESSINCE 1996

The study panel was struck by how muchCMS’ responsibilities have increased in recent

years. Since 1996, Congress has enacted fourmajor pieces of legislation that dramaticalyincreased the agency’s responsibilities.

The Health Insurance Portability andAccountability Act (HIPAA) of 1996 gaveCMS three very significant tasks: oversightof state regulation of private health insuranceplans to ensure availability and portability ofprivate health insurance, responsibility foradministrative simplification for all electronichealth care transactions, and greatly expand-ed responsibility for Medicare fraud andabuse. Notably, the first two responsibilitiesare not directly related to Medicare.

In 1997, Congress enacted the BalancedBudget Act (BBA), which made sweepingchanges to Medicare law. It created MedicarePart C, which offers a broader range ofhealth plan choices to beneficiaries, anddirected CMS to mount a comprehensivecampaign to educate beneficiaries aboutMedicare and their new health plan choices.In addition, the BBA created four newprospective payment systems (for skillednursing facilities, home health agencies, out-patient hospital departments, and rehabilita-tion hospitals). Sophisticated design andanalytic work must precede implementationof prospective payment systems, and imple-mentation itself is complicated and labor-intensive. Other new responsibilities createdby the BBA include establishing coverage andpayment policies for several new preventivehealth benefits. Although not Medicare-relat-ed, the BBA also gave the implementation ofthe new State Child Health InsuranceProgram (SCHIP) to CMS, which required asubstantial commitment of agency time andresources. In all, the BBA had 359 provisionsthat required agency action to implement.Many of the provisions, particularly those


N a t i o n a l A c a d e m y o f S o c i a l I n s u r a n c e

involving information systems changes atCMS or the contractors, were not imple-mented on the date Congress set because theagency delayed all systems work to prepare itslegacy information and claims processing sys-tems for the transition to Year 2000.

The Balanced Budget Refinement Act(BBRA) of 1999 was less far-reaching inscope and contained only 126 provisions toimplement. Although the BBRA did notcontain any major new initiatives, its “giveback” provisions touched most aspects ofMedicare, including significantchanges in newly implementedprospective payment systems, andrequired agency regulatory action.

Congress enacted another bill in2000—the Medicare, Medicaidand SCHIP BenefitsImprovement Act (BIPA) of2000—that further rolled backmany of the deficit reduction fea-tures of the BBA. CMS reportedthat it contained 152 provisions toimplement.

Management Issues

Over the years, CMS has beencriticized for poor management ofMedicare. This criticism has inten-sified in the last several years, partly becausethe agency was slow to implement some pro-visions of law, and partly because of philo-sophical differences about what type ofprogram Medicare should become in thefuture. Some believe that Medicare is an anti-quated fee-for-service (FFS) program. Othersbelieve that its leadership and staff have beentoo vested in maintaining the status quo toadapt to a different program structure. Whilethe study panel acknowledges that these pre-

dispositions have colored evaluations ofCMS’ performance, it focused its work ondetermining whether the agency was per-forming current responsibilities well and recommending changes or alternative struc-tures that could improve the agency’s performance.

Resources not Commensurate with Responsibilities

The panel found a serious mismatch betweenthe agency’s responsibilities and its resources.

This mismatch has grown worsein recent years as CMS’ responsi-bilities have increased dramatically.From FY 1992 to 2002, in infla-tion-adjusted (real) dollars, benefitoutlays have increased 97 percentand claims volume has increased50 percent, while program man-agement appropriations haveincreased only 26 percent and thenumber of full time equivalentemployees (FTEs) 12 percent.Growth in the number of contrac-tor staff has been even slower, atsix percent, during this period.

Beginning in 1996 with the enactment of HIPAA, both themagnitude and the scope ofresponsibilities given to CMS have

grown enormously, while the size of the staffhas increased only modestly. The breadth ofthose new responsibilities, especially thoseunrelated to Medicare, such as the healthinsurance and administrative simplificationprovisions of HIPAA and the State ChildHealth Insurance Program in the BBA, haveposed exceptional challenges to the agency.Some of the new Medicare tasks, such as theMedicare Education Program and the newprovider types in the BBA have been very

8

The panel found aserious mismatch

between theagency’s responsi-

bilities and itsresources.… the

sheer number andhighly specificcontent of lawspassed in recent

years have severe-ly taxed the

agency’s ability tocomply with the

requirementsimposed on it.

resource-intensive. In addition, funding tocontractors, who are responsible for imple-menting new provisions through changes toinformation systems and instructions toproviders, has not kept pace with the addi-tional work given to them.

Congressional Micromanagement

The study panel also considered the questionof whether Congress is too involved in thedetails of CMS. Although Congress isresponsible for the Medicare statute andgiving direction to the agency, the sheernumber and highly specific content of lawspassed in recent years have severely taxed theagency’s ability to comply with therequirements imposed on it. In addition,Congressional committees and individualmembers have become increasingly involvedin program operations.

The panel found that a primary contributorto the increased specificity in law derivesfrom the role of “scoring” in the budgetprocess. In budget reconciliation, Congresspasses a budget resolution to determine gov-ernment spending for the next fiscal year, andcommittees are directed to report bills thatare within budget targets. The CongressionalBudget Office (CBO) plays an importantrole because it assigns a savings or cost esti-mate (called a score) to every legislative pro-vision. CBO is increasingly reluctant to assigna score to a provision unless it is fairly specif-ic, and Congress has responded by enactinglaws that are very detailed.

Other reasons contributing to increasedspecificity include mistrust between theCongress and the administration. Congresshas not always trusted the administration—particularly when one party controls the

Congress and the other the White House—to implement provisions in accordance withits wishes, and has dealt with that by makingthe law very specific. Health care providersand others in the industry have also lobbiedfor great specificity.

The study panel concurs with the viewsexpressed by some that Congress has beentoo prescriptive in statute. Detailed legisla-tion impedes agency discretion and requiresCongress to make changes that should bewithin the agency’s authority. However,given the requirements of the budgetprocess, the degree of specificity seemsunlikely to diminish significantly. What seemsto be needed is a greater sense of trust andcomity between the agency and Congress. Inthe study panel’s view, the agency would alsobenefit from a respite in implementing newlaws and in greater administrative flexibility.

Inability to Implement Laws on Time

CMS has been roundly criticized for fallingbehind in implementing provisions ofHIPAA, the BBA, the BBRA, and BIPA.CMS did not keep track of HIPAA imple-mentation, but reported in its 2002 strategicplan that it had implemented 75 percent ofthe BBA, 80 percent of the BBRA, and 15percent of BIPA. Unquestionably, CMS’decision to delay implementing key provi-sions of the BBA in order to assure that itsinformation systems could function in year2000 was a key reason for the backlog inimplementing the BBA, and had a ripplingeffect on later laws. The study panel notes,however, that the sheer volume of changes inthe BBA, BBRA, and BIPA and tight imple-mentation timelines would have presented adaunting challenge to any agency, even withadequate resources.


Oversight of Contractors

Another area of vulnerability for CMS ismanagement of its contractors. GAO and theOIG have produced numerous reports docu-menting shortcomings in the agency’saccounting procedures and oversight of con-tractors. One of the frequently cited statisticsis the error rate—the percentage of claimspaid improperly because the services weremedically unnecessary, documentation wasinsufficient, the claims had coding errors, orMedicare did not cover the services. In 1996,the OIG estimated the error rate at 14 per-cent. The error rate has sometimes been usedincorrectly as a measure of fraud and abuse.It is important to note that not all of theerrors represent efforts to defraud or abusethe program. For example, some of what iscounted in the error rate reflects codingerrors or lack of documentation for appropri-ate services. In any event, the error ratereflects inaccurate or incomplete billing ordocumentation and measures claims thatwere paid when they should not have been.While equating the error rate with fraud andabuse is too simplistic, it is appropriate toconsider the error rate as a reflection of inad-equate oversight by the contractors andCMS.

Other indicators of poor oversight of con-tractors include legal settlements with con-tractors following allegations of improper orillegal actions. Since 1993, CMS has enteredinto settlements with 14 contractors, withsettlements exceeding $350 million. In 2001, the OIG reported that it had 24former or current contractors under investigation.

Despite continuing problems, both GAO andOIG credit CMS with improved contractoroversight in the last few years. The error ratedeclined to 6.8 percent in 2000 and theagency received a “clean” audit opinion forthe first time. CMS has appointed a manage-ment board to oversee contractors, separatedcontractor management from contractor eval-uation, and assigned additional staff to moni-tor contractors. However, both GAO andOIG still find problems with managementand accounting.

Numerous provisions in Medicare law limitCMS’ ability to effectively manage the con-tractors, or to expand an ever-shrinking poolof contractors. Each year since 1993, theagency has asked Congress to enact contrac-tor reform legislation.3 Both GAO and OIGhave consistently testified in support of thislegislation, but Congress did not seriouslyconsider it until 2001. The MedicareRegulatory Relief and Contractor ReformAct passed the House of Representatives onDecember 4, 2001 by a vote of 408-0 and iscurrently pending in the Senate.

Both the contractor management function atCMS and the administration of the programby contractors have suffered from resourcelimitations. In addition to paying claims, con-tractors have primary responsibility forinforming and educating providers aboutchanges in law and policy, and the passage ofthe BBA, BBRA, and BIPA have seriouslystrained contractors’ ability to perform allrequired functions. In particular, providereducation and customer service to providershave suffered in recent years.

3 The Reagan administration also sent contracting reform legislation to Congress.


Information Systems

CMS and its contractors have hundreds ofinformation systems, most of which were notdesigned to communicate with each otherand are seriously outdated. In 1994, CMSundertook a sweeping systems modernizationproject called the Medicare TransactionSystem (MTS). Design and implementationof this system did not proceed smoothly, andCMS abandoned the project in 1997 in favorof a more incremental approach.However, work on Year 2000conversion delayed the agency’swork on new systems. GAO hasissued several reports on theagency’s information systems plan,and is concerned that resourcelimitations, including both lack offunding and staff expertise, posethreats to the success of theagency’s plan.

Fraud and Abuse

In the late 1990s, complaints sur-faced that CMS was too aggressive in investi-gating fraud and abuse and had unfairlyaccused providers of misconduct when theyhave made innocent billing errors. The cli-mate has changed dramatically since the early1990s, when fraud and abuse detectionefforts were relatively lax, to a zero tolerancepolicy in the Clinton administration. Thepassage of HIPAA in 1996 was a landmarkevent, although its significance was not wide-ly recognized at the time. HIPAA dramatical-ly increased funding for fraud and abuse, andgave investigative and law enforcement agen-cies a much more prominent role and greaterindependence than they had before.

Prior to HIPAA’s enactment, fraud andabuse activities (also known as program safe-guards) were funded primarily from CMS’

contractor budgets, and competed with othercontractor functions, including paying claims.Over time, the funding for program safe-guards eroded. HIPAA changed that by giv-ing CMS funding for special programintegrity contracts, and providing substantialfunding to OIG in HHS, the Department ofJustice (DOJ), and the Federal Bureau ofInvestigation (FBI) for enforcement actions.Predictably, these agencies used these funds

to pursue health care fraud andabuse vigorously, and the level oflaw enforcement activitiesincreased substantially. The DOJalso began to use the False ClaimsAct (FCA) more aggressively topursue health care fraud andabuse.

A backlash resulted, leading toproposals to limit enforcementactions. Legislation was intro-duced in Congress to limit DOJ’sability to use the FCA. The pro-

posal did not become law, but its considera-tion led DOJ to take actions on its own tolimit situations in which the FCA could beused. Resentment also grew about CMS’administrative actions to detect fraud andabuse, and encourage providers to enter intosettlements. Another bill, the MedicareRegulatory and Contracting Reform Act of2001, would limit CMS’ authority in severalways to review claims for fraud and abuseand revise procedures for collecting overpay-ments. It would also give providers moreinformation about fraud and abuse detectionand prevention activities. It passed the Houseof Representatives in 2001, and is currentlypending in the Senate.

The study panel views effective fraud andabuse prevention and detection efforts as


CMS and its contractors have

hundreds of infor-mation systems,most of which

were not designedto communicatewith each otherand are seriously

outdated.

essential to protecting the integrity ofMedicare. Getting the right balance betweeneffective fraud and abuse detection andenforcement and maintaining a positive rela-tionship with the provider community is adelicate matter. Public sentiment and policyhave vacillated between aggressive enforce-ment and complaints that aggressive fraudand abuse detection efforts were unfairlyfrightening and penalizing honest providers.The study panel believes that CMS and lawenforcement agencies probably pursued fraudand abuse too aggressively at times in thepast, especially since CMS and its contractorsfrequently have not given providers clear andconcise explanations of coding and billingrequirements. More resources and attentionshould be devoted to assuring that providershave the right information to code and billcorrectly.

Communications with Beneficiaries

CMS has also been criticized for its commu-nications with beneficiaries. The BBA direct-ed CMS to conduct a comprehensivecampaign to educate beneficiaries aboutMedicare and about expanded Medicare+Choice (M+C) benefits in particular. Underspecific instructions from Congress, CMSwas directed to provide beneficiaries withdetailed information about benefits andhealth plan options, establish a toll-free tele-phone line to answer beneficiary questions,and maintain an Internet site. About 75 per-cent of the National Medicare EducationProgram (NMEP) was funded through auser fee on M+C plans, with the balancefrom the Medicare general administrativeaccount and the Quality ImprovementOrganizations (QIOs, formerly called thePeer Review Organizations (PROs)) account.CMS spent an average of $107.8 million ayear from FY 1998-2000 on the NMEP.

From the start, the funding mechanism wascontroversial. The M+C plans argued thatthey should only have to pay their propor-tionate share of the education campaign, notthe bulk of it. They also maintained that theycould do a better and less costly job thanCMS, and that CMS’ presentation was slant-ed toward traditional Medicare. Congressresponded to their complaints in the BBRAby scaling back the user fees from $95 mil-lion to $17 million for 2001. CMS adjustedto the loss of the approximately $78 millionin user fees by drawing down unspent fundsfor 2001. However, beginning in 2002, thefull impact of the reduction will be felt,requiring either additional funds or a scalingback of the program.

In the BBRA, Congress directed GAO tostudy the NMEP and report back periodical-ly. In its first report, issued in September2001, GAO said that beneficiaries and theiradvocates generally gave the program highmarks, but the M+C plans were more critical.Overall, GAO reported that the NMEPincreased the amount and type of informa-tion regarding Medicare and M+C plans.However, it was unable to evaluate whetherthe NMEP persuaded beneficiaries to activelyconsider health plan choices.

The study panel believes that the controversyabout the funding source of the NMEPprobably influenced some organizations’views. The panel believes that a strong edu-cation campaign is essential, particularlygiven Medicare’s complexity. While itbelieves that more education efforts wouldbe beneficial, it commends CMS for theprogress it has made so far. The Medicareand You handbook, the toll-free line, theinternet site (including comparative informa-tion about nursing homes, health plans, and


Medigap insurance) have clearly given benefi-ciaries far more access to objective informa-tion than they had before.

Leadership and Staffing Issues

The study panel also looked atconcerns about lack of continuityin leadership, too few senior exec-utives to manage the agency’sworkload, an impending “braindrain” as senior managersapproach retirement, and an over-ly insulated staff that does nothave the appropriate skill set tomanage such a complex program.

The study panel is concernedabout the length of time acting administra-tors have led the agency and about the aver-age tenure of the administrator, and believesthat steps should be taken to encouragegreater longevity. The panel also believes thatthe salary of the administrator ought to beincreased to reflect the stature of the positionand the scope and depth of the administra-tor’s responsibilities. Similarly, the panel isconcerned that CMS has far fewer seniorexecutives than other agencies with signifi-cantly smaller budgets. Additionally, manysenior executives are either approachingretirement or considering other offersbecause the demands on them are too greatand the resources too few. The agency alsoneeds to recruit and retain staff with somehighly technical skills, such as informationsystems specialists and actuaries, and staffwith significant private sector experience, if itis to meet its responsibilities. The study panelbelieves that giving the agency some targetedflexibility from the civil service personnelrules and hiring caps would assist in suchrecruitment and retention.

ALTERNATIVE GOVERNANCEMODELS

In addition to examining the existing CMSgovernance structure, the study panel lookedat alternative structures to determine whether

a different structure might helpthe agency better accomplish itsmission. The models included:the independent agency model(e.g. Social Security), the indepen-dent board model (e.g. theFederal Trade Commission), theperformance-based organizationmodel (e.g. the Office of StudentFinancial Assistance in theDepartment of Education and thePatent and Trademark Office in

the Department of Commerce), and the gov-ernment corporation model (e.g., the UnitedStates Post Office).

In considering whether a different gover-nance structure might help Medicare runmore efficiently, the study panel consideredthe words of Hippocrates, “First, do noharm.” In order to recommend a differentgovernance structure, the panel would haveto judge it clearly superior to the currentstructure for the long-term. In addition, thebenefits of adopting an alternative structurewould have to outweigh the costs (both fiscaland psychic) of implementing it. Adopting adifferent governance structure would requireconsensus, entail considerable use ofresources, and slow down, at least for a time,the work of the agency. Research also showsthat externally imposed reorganizations areless likely to succeed than internally drivenreorganizations, because they are less likely totake organizational culture into account, lesslikely to be rooted in sound policy theory,and more likely to trigger bureaucratic resis-tance (Gormley 2000).


While the panelbelieves that moreeducation effortswould be benefi-cial, it commends

CMS for theprogress it hasmade so far.


Based on these considerations, the studypanel did not reach consensus that the cur-rent governance structure is fatally flawed orthat one of the alternative models should beadopted in its purest form. The panel mem-bers held widely divergent views aboutwhether other governance structures wouldbe preferable. Some panel members thoughtthat one or more of the governance modelscould be customized to fit the particular cir-cumstances of CMS. A number of membersfound promise in the model of SocialSecurity as an independent agency and sug-gested that the Social Security Administra-tion’s experience in moving to independentagency status and its track record since inde-pendence be studied further to see if CMScould benefit by becoming an independentagency. However, other members cautionedagainst the independent agency approachbecause CMS would lose the advocacy andprotection of the Secretary. In their view, thecurrent governance structure is appropriate,although some structural separation of FFSand M+C within CMS would help allay con-cerns about inherent conflicts of interestbetween the two. The panel also discussedthe merits of streamlining the HHS depart-mental review process, so that CMS canoperate more efficiently. Such an approachmight relieve some of the most critical problems CMS has as an operating agency of HHS without the disadvantages of independence.

Some panel members viewed the boardmodel, in which CMS would report directlyto Congress and thus not be accountable tothe President, as a desirable model for gov-erning Medicare + Choice. They said it couldimprove administrative capacity and offerincreased flexibility, if the board were struc-tured to be independent of any executive

agency. Some panel members also urged con-sideration of a board that would be locatedwithin HHS and thus accountable to theSecretary and the President. Other panelmembers, who opposed the board, expressedconcerns about Congress’ ability to hold theboard accountable for sound decision-makingand the constitutionality of an independentboard. Further, they said that a program aslarge and vital as Medicare ought to beaccountable to the President.

Some panel members expressed the view thatthe fundamental problem stems more fromthe detailed nature of the statute than thegovernance structure. One possible remedyfor that would be changing Medicare to bemore like FEHPB so that Congress would nothave to be nearly as involved as they are now.The FEHPB statute is much less prescriptivein terms of benefits and reimbursement.

Two of the models were judged not suitablefor CMS. The study panel concluded that thePBO model was probably not appropriate forCMS as a whole, although the concept mightbe useful in managing contractors. While itsadministrative flexibilities would be advanta-geous to CMS, they also have the potentialto make the relationship between HHS andCMS counter-productive. Moreover, thestudy panel believes the PBO model wouldnot work well for CMS. In their view, manyof the advantages of being a PBO could beconferred on CMS through specific changesin legislation, without actually changing itsgovernance structure. The precedents forperformance-based organizations also seemto be for organizations with a narrower mission and not nearly the same scope in policy-making.

The study panel also viewed the governmentcorporation model as not well suited to



Medicare program administration. Successfulexamples of this model normally have adefined way of generating revenue to becomefinancially self-sustaining. Since CMS offersfew business-type services to the public, thismodel does not seem to be applicable.

RECOMMENDATIONS

Recommendation 1

Medicare policymakers should act now toaddress administrative and managementproblems in CMS regardless of whetherCongress takes action on broader Medicarereform.

Recommendation 2

A panel of independent experts should beappointed to prepare an analysis of theimpact on Social Security and its stakeholdersof its transition from an operating agencywithin the Department of Health andHuman Services to a free-standing agency.Such a report should also include an analysisof the implications of such a change forCMS.

Recommendation 3

In order to enable CMS to fulfill its responsi-bilities, Congress should increase administra-tive funding for the agency.

Recommendation 4

In the absence of a decision by Congress tofundamentally reform Medicare, or providesubstantial new investment of resources, bothfinancial and human, the study panel urgesCongress not to enact major changes to theprogram in the near term because CMS doesnot currently have either the resources or thecapacity to implement such changes in atimely fashion while managing the existing

program and the changes enacted in the lastfew years. The study panel also urgesCongress to shift its focus from micromanag-ing CMS to giving the agency more adminis-trative latitude to accomplish the goalsCongress sets for it.

Recommendation 5

Congress should consider removing fromCMS some functions not directly related toMedicare or Medicaid so that the agency canfocus more on its core missions. Some func-tions that might be removed from CMSinclude oversight of the Clinical LaboratoryImprovement Act (CLIA) and responsibilitiesin the Health Insurance Portability andAccountability Act for oversight of privatehealth insurance and administrative simplifi-cation of health business transactions.

Recommendation 6

Congress should furnish CMS with newmulti-year funding to develop and implementimproved information systems. CMS shouldseek expert guidance and assistance in imple-menting these systems.

Recommendation 7

Congress should authorize the President toappoint, subject to Congressional approval,the administrator of CMS to a fixed term andfurnish protection against arbitrary removal.Congress should increase the salary of theadministrator to better reflect the stature andresponsibilities of the position. The CMSadministrator’s salary should be commensu-rate with the Commissioner of the SocialSecurity Administration.

Recommendation 8

Congress should grant CMS some relief fromboth limitations on salary and civil service

N a t i o n a l A c a d e m y o f S o c i a l I n s u r a n c e16

personnel rules to recruit and retain staffwith technical skills (such as actuaries orinformation systems experts) or highlysought-after expertise.

Recommendation 9

In order to recognize Medicare’s economic,social, and budgetary impact, as well as itsrole in the nation’s health care system,Congress should create a joint committee toserve as a central source of information andanalysis. Membership of the committeeshould be comprised of members from theHouse Ways and Means Committee, theHouse Commerce Committee, and theSenate Committee on Finance.

Recommendation 10

Congress should enact legislation that givesCMS more flexibility to contract with neworganizations to process Medicare claims.Additional resources should be provided tocontractors to better help them meet theresponsibilities with which they are entrusted.

CMS should build service standards for cus-tomer service in contractor contracts anddevote more attention to assuring that infor-mation supplied to health care providers istimely, accurate, and easily understandable.

Recommendation 11

Congress should provide resources to CMSto provide more real-time assistance to bene-ficiaries with Medicare-related problems bytelephone, via the internet, or by establishingMedicare help desks in Social Security fieldoffices. Regardless of the method, thosehelping beneficiaries should have access tobeneficiary claims records.

Recommendation 12

To ensure that beneficiaries and their familieshave the information they need to makeinformed choices about the Medicare pro-gram, Congress should provide adequatefunding for the National Medicare EducationProgram.


The National Academy of Social Insurance(NASI) convened a study panel on Medicaregovernance and management as part of itsproject to examine the key issues policymak-ers face in structuring Medicare for the long-term. As with other study panels convenedby the Academy, this panel aimed to providean objective, evidence-based analysis of theneed for change and the options at hand.This is the panel’s final report.

THE CONTEXT FOR CONSIDERINGCHANGES IN MEDICARE’SGOVERNANCE ANDADMINISTRATION

Ideas for changing how Medicare is gov-erned and administered have engaged policy-makers for the past several years. Proposals toredesign the program’s systems and struc-tures for governance and management havefigured prominently in Congressional hear-ings and have been the subject of substantialdiscussion in Washington’s leading thinktanks, advisory agencies, and advocacygroups. When this panel began its work,Medicare restructuring was often mentionedas a key Congressional priority. Since then,the terrorist acts of September 11 have dra-matically altered priorities, with much greaterattention to homeland security and nationaldefense. However, while Medicare restructur-ing may not be the top priority of either theAdministration or Congress in 2002, thesheer size of Medicare’s budget and thenumber of Americans’ lives it touchesinevitably give it a prominent place on thenational agenda.

Three motives underlie proposals for chang-ing how Medicare is run:

■ a desire to fix problems in the wayMedicare is currently governed andmanaged,

■ a concern that the existing governanceand management structures and systemscannot be adapted to suit potentialchanges in the Medicare program, and

■ a belief that Medicare’s governance andmanagement is not designed to facili-tate the program’s objectives.

The first type of call for change has beenissued by the stakeholder community, com-prised of the various groups with a vestedand direct interest in the successful accom-plishment of various functions of theMedicare program, such as making accurateand timely payments to providers or ensuringthat beneficiaries have access to quality healthcare services. Nearly every interest groupaffected by the program has raised concernsabout how Medicare is run.

A second source of concern about Medicaregovernance and management comes fromMedicare policy analysts, and others engaged

Chapter 1:Introduction

Definition of terms used in this report

Governance refers to the organization that haslegal authority for the administration of Medicareand whether that authority is perceived to beeffective.

Management refers to a structure and a set of systems and processes by which the program ismanaged.


in a discussion of whether and how to under-take restructuring the program. Some believethat fundamental changes in Medicare mustbe undertaken if the program is to survive inthe long run. Such changes may result in adifferent set of functional responsibilities forthe program. As they consider such funda-mental changes, policymakers also must con-sider whether the program may benefit fromor require a complementary change in gover-nance or management.

Finally, some political scientists, economists,experts in public administration, and otherswho approach Medicare governance andmanagement from an academic perspectiveare concerned that the current structure—irrespective of any future program changes—is imbued with incentives that conflict withthe goals of running the program efficientlyand effectively.

Although today’s calls for reform spring fromdifferent sources, they tend to reinforce oneanother. It is in this context that theAcademy’s study panel on Medicare manage-ment and governance was charged withexamining the need for changing Medicare’sstructures and systems, and potential pre-scriptions for doing so.

THE STUDY PANEL APPROACH

In summer 2000, NASI convened a group ofexperts to examine Medicare’s governanceand management. The panel was not chargedwith evaluating the need for changingMedicare’s mission or the ways in which coreresponsibilities associated with program man-agement might be altered to address costcontainment or program modernizationgoals. Other panels and commissions havetaken on those questions. Rather, the panelfocused on whether the program’s gover-

nance and management support the success-ful accomplishment of Medicare’s mission.

The panel includes experts on the Medicareprogram and its history and experts on thedesign of effective organizations and over-sight of large public and private programs.Among the panelists are two formerAdministrators of HCFA, formerCongressional staff members, and others whowork on Medicare policy as representatives ofphysicians, hospitals, and health plans.Panelists also brought to bear their experi-ence as researchers, analysts, and legal schol-ars, and their expertise in publicadministration and program management.

The panel met seven times over eighteenmonths to assess the nature and extent of theproblems driving administrative reform dis-cussions and to evaluate potential solutions.In the course of its work, the panel heard tes-timony from many of those in leading rolesin program administration and governance,and engaged in discussion with expertobservers from a variety of vantage points.The panel discussed reports, articles, and policy proposals, including work it commis-sioned to explore aspects of existing prob-lems not well documented elsewhere. Insome of the most challenging aspects of itswork, the panel examined the experience ofother organizations, agencies, and programswhose governance and management modelsmight offer lessons for Medicare.

In the end, the panel found much commonground, although consensus was not possiblein all areas. This report synthesizes the find-ings from research and analyses that thestudy panel conducted, commissioned, andreviewed to address the policy-issues regard-ing Medicare’s governance and management.It also presents the panel’s findings and rec-

ommendations and describes issues on whichmembers’ views diverged.

A FRAMEWORK FOR EVALUATINGMEDICARE’S GOVERNANCE ANDMANAGEMENT

In the ideal world, a program’s governanceand management would be designed to fos-ter the best performance of the tasks thatmust be accomplished to meet the program’sobjectives. To assess whether a particularstructure works, policymakers can look atwhether the program’s objectives are beingmet. To assess options for change, policy-makers can use established criteria to evaluatecomponents of the alternative models.

CRITERIA FOR EVALUATINGMEDICARE’S GOVERNANCE ANDMANAGEMENT

To provide a framework for assessingMedicare’s current governance and manage-ment, as well as alternative structures thatcould be considered, the panel developed aset of evaluation criteria. The criteria put for-ward by the study panel are: capacity,accountability, and credibility.

Capacity refers to the organization’s abilityto accomplish its required functions andachieve its programmatic objectives, whileoptimizing efficiency, effectiveness, comport-ment with legal and ethical standards, andother implicit guidelines. Evaluating capacityrequires considering issues such as: Does thestructure have the level of resources (finan-cial, human, technological, and organization-al) required to do its job? Does it have theamount of technical expertise needed? Can itaccess and utilize the information relevant tothe work? Does it have flexibility needed to

adapt to changes in the environment inwhich it operates?

Accountability is the extent to which pro-gram administration is liable for making deci-sions and taking actions consistent with itsmandate. What mechanisms are in place toensure that administrative actions and deci-sions are legal, ethical, and appropriate?Under what authority is oversight furnished?What redress is available for remedyingerrors? Is it responsive to constituents andstakeholders? Do they have ways to provideinput on the rules, structures, processes, andoutcomes that result from management decisions?

Credibility is largely dictated by howobservers perceive an organization’s capacityto accomplish its mission and its accountabili-ty to authority. Because such perceptionsreflect individual judgments, credibility doesnot necessarily correlate completely withcapacity and accountability. Determinants ofcredibility include sufficient and transparentsources of authority. A credible organizationis characterized by robustness against rivalsfor authority that is adequate to dissuade fre-quent challenges.

GUIDELINES FOR APPLYING THE CRITERIA

Applying these criteria to the evaluation of aprogram’s governance and administration isnot simple because not all of the attributescan be achieved simultaneously, and all gov-ernance models fall short of the ideal. Inpractice, policymakers should determinewhich criteria are most important to them,and then choose a model that comes closestto maximizing their priorities.



When a program’s mission changes in impor-tant respects, new technology allows for anew method of accomplishing themission, or public expectationshave changed significantly,changes to the governance andmanagement should be consid-ered. The notion that form shouldfollow function is a critical princi-ple that suggests the need forchanges in governance and man-agement when the functionalactivities associated with running aprogram change. Given an impe-tus for change, whether to try to redesignthe former structures or start anew is animportant decision. Designing a new gover-nance structure to accommodate new func-tional requirements of a program has appeal,in that such a structure could be custom-

made to meet the challenges at hand.However, the motivation to start over must

be balanced against the fact thatthere are unknown, but lurking,flaws in any new alternative.Furthermore, there are usuallyconsiderable costs and risks inmaking a transition in either gov-ernance or management. Programbeneficiaries, for example, valuestability in the program. They andother stakeholders are invested inthe status quo and would have toaccommodate to new structures

and systems. These costs and risks suggest abias toward the status quo, absent com-pelling and demonstrated need to start freshor the certainty of significant improvement.However, there are also risks to inaction thatmust be weighed.

The motivation tostart over must bebalanced againstthe fact that there

are unknown, but lurking, flaws

in any new alternative.

I m p r o v i n g M e d i c a r e ’ s G o v e r n a n c e a n d M a n a g e m e n t

MEDICARE’S CONTRIBUTIONS TO THE HEALTH OF THE ELDERLYAND DISABLED

Any thoughtful consideration of changingMedicare’s governance or managementshould begin with a thorough understandingof its history, mission, responsibilities, andcurrent operations. Medicare was enactedinto law in 1965, after decades of debateabout how best to meet the health care needsof elderly Americans. At its enactment, it wasmodeled after the existing employer healthinsurance market, with benefits, administra-tion, and payment methods based on BlueCross and Blue Shield plans then prevalent.It is an entitlement program, meaning that itis available to all elderly and disabled personswho meet the eligibility requirements.

Prior to enactment, about half of all seniorcitizens were uninsured. Today, Medicareprovides health insurance to more than 39million people, including more than 5 mil-lion disabled people under age 65.4 Virtuallythe entire population over age 65 (97 per-cent) is insured by Medicare. The program isenormously important to both the economicsecurity and health-status of elderlyAmericans, and it also plays a substantial rolein improving the health care system. BeforeMedicare, nearly one-third of senior citizenswere poor, and paid more than 50 percent oftheir health care costs out of pocket. Today,the proportion of seniors living in povertymirrors the younger population—about 10

percent. Medicare has dramatically increasedaccess to health care, particularly for minori-ties, and has contributed to significantincreases in life expectancy for the elderly. In1960, a 65-year-old American woman couldexpect to live an additional 15.9 years toreach the age of 80.9. That same year, a 65-year-old man could expect to live an addi-tional 12.9 years to the age of 77.9. Today,the average life expectancy of a 65-year-oldwoman has increased nearly 20 percent to84.2 years, and the average 65-year-old mancan expect to live to the age of 80.9. WhileMedicare has given minority beneficiariesincreased access to health care services, thereare still significant differences between thehealth status and life expectancy of minorityand white beneficiaries. For example, twentysix percent of white beneficiaries viewedthemselves as being in poor health, comparedto 45 percent of African American beneficia-ries and 42 percent of Hispanic beneficiaries(Henry J. Kaiser Family Foundation, 2001).

Medicare also plays a key role in the U.S.health care system. In 2000, Medicare cov-ered about 14 percent of the U.S. populationand financed 19 percent of the nation’shealth care spending. By virtue of its size,Medicare has an enormous effect on theentire health care system. And as babyboomers age into Medicare, its size andinfluence will continue to grow.

Chapter 2:An Overview of Medicare

4 Unless otherwise noted, the data in this section are derived from (DHHS 2000).

21


5 The Secretary subsequently delegated the health insurance portability provisions to CMS.

22

In addition to its role of financing health carefor the elderly, Medicare has, since its incep-tion, made important contributions to healthand safety standards in hospitals, nursinghomes, and other health care facilities, and tothe training of health care professionals. As acondition of receiving Medicare funds, thesefacilities must meet certain quality and safetystandards (“conditions of participation”) thatapply to all patients served, not just those onMedicare. More than 6,000 hospitals nowparticipate in Medicare, along with 41,800health plans and long-term care and otherfacilities, 861,800 physicians and other prac-titioners and 168,300 laboratories (DHHS2001a). Medicare also makes direct financialcontributions to the training of new physi-cians and other health care providers. In2000, Medicare paid nearly $8 billion to U.S. hospitals to help train new health careproviders.

Over time, Congress has expandedMedicare’s scope, mission, and responsibili-ties substantially. In 1972, Congress expand-ed Medicare’s scope by adding two eligibilitycategories: disabled people under age 65 andthose with end stage renal disease. In 1985,Congress expanded Medicare’s mission byauthorizing subsidy payments to hospitalsthat serve a disproportionate share of lowincome Medicare and Medicaid beneficiaries.These payments are not linked to providingcare to Medicare beneficiaries, but serve abroader goal of protecting vulnerable hospi-tals. They provide an important financial“safety net” for these hospitals, many ofwhich could not provide care to poor anduninsured people without these subsidies. In2000, Medicare paid $4.6 billion to thesehospitals.

Over the years, Congress has attempted toredress deficiencies in the health care system,and improve the quality of health carethrough greater federal oversight or regula-tion. In large part, these regulatory responsi-bilities have been assigned directly toMedicare or to the federal agency thatadministers Medicare, CMS. For example, in1980, Congress required federal oversight ofMedicare supplemental (Medigap) insuranceto address marketing abuses. In 1988, inresponse to allegations of poor quality inclinical laboratories, Congress establishedfederal quality standards for all clinical labora-tories. In 1996, Congress passed the HealthInsurance Portability and Accountability Act(HIPAA), to give Medicare a much strongerrole in preventing and detecting fraud andabuse, to give the Secretary of Health andHuman Services (HHS) broad authority tooversee portability in private health insuranceplans and greater authority to regulate theformat and electronic submission of healthcare transactions.5

Medicare has frequently been on the leadingedge of developing innovative payment sys-tems subsequently adopted by many otherpayers. Medicare was the first to use prospec-tive payment systems for inpatient hospitalservices, a new resource-based payment sys-tem for physician services, and prospectivepayment systems for outpatient hospital ser-vices, home health agencies, skilled nursingfacilities, and rehabilitation hospitals.

Today, Medicare is an infinitely more com-plex and larger program than envisioned atits enactment. In part, increased complexitystems from these expansions in its mission,scope, and responsibilities. But it is alsoimportant to remember how vastly the prac-


tice of medicine has changed since 1965.Unprecedented advances in technology andmedical science, such as CAT,MRI, and PET scans; organ trans-plants, and laparoscopic surgery,to name just a few, have resultedin quantum improvements inhealth care. At the same time, thepace of change in diagnostic andclinical care has increased thecomplexity of administeringMedicare an enormous degree.

Taken together, all these forces have com-bined to make Medicare a formidable pres-ence both in the nation’s health care deliverysystem and the federal budget. Medicare isthe second largest social program (afterSocial Security), and surely one of the most,if not the most, complex. While mostobservers would agree that Medicare hasbeen highly successful in meeting its missionof providing health care to elderly Americans,any program of this magnitude is inevitablysubject to criticism and calls for reform, par-ticularly since the demographics of the babyboom generation will cause increasing bud-get pressures.

MEDICARE’S ADMINISTRATIVEHISTORY

Key decisions that were made in establishingthe Medicare program continue to affect itsadministration today. To better understandMedicare’s current governance and manage-

ment, the panel thought it would be usefulto understand why Medicare was designed

the way it was. To this end, itcommissioned a review of theadministrative history ofMedicare. This section provides abrief overview of some of theimportant developments inMedicare’s administrative historyand describes the impact of criticaldesign decisions on the program’sevolution.6

When Medicare was enacted in 1965, policy-makers envisioned Medicare as another com-ponent of the nation’s social insurancesystem for the elderly. (This distinguished itfrom the Medicaid program, seen as part ofthe welfare safety net.) This distinction, aswell as the decision to link Medicare eligibili-ty to Social Security eligibility, resulted in theresponsibility for Medicare being given toSSA, an agency widely respected for its effi-cient administration of payments to beneficia-ries and its talented staff. SSA’s role inadministering Medicare had a profoundimpact on the program. The agency’s orien-tation toward beneficiaries, its commitmentto social insurance, and expertise in makingtimely and correct payments to beneficiariescontributed to the initial success of the pro-gram in many respects.

At Medicare’s inception, a key decision aboutwho would administer the program was

6 Much of this overview was distilled from a report by Jonathan Oberlander commissioned by the study panel toaid in its understanding of why Medicare administration and governance structures were designed as they were,and how they have evolved over time. In addition to original interviews conducted for this study, Oberlanderdrew upon sources such as A Report on the Implementation of the Social Security Amendments of 1965, byRobert Ball, November 15, 1965, reproduced in Reflections on Implementing Medicare (Washington, DC:National Academy of Social Insurance, 2001); The Politics of Medicare by Theodore Marmor (Chicago:Aldine,1973); and Medicare:The Politics of Federal Hospital Insurance by Judith Feder (Lexington, MA: Health, 1977).

Today, Medicare isan infinitely more

complex and larger program

than envisioned atits enactment.


made. In response to fears articulated by theAmerican Medical Association and othersthat federal administrative control ofMedicare would be tantamount to socializedmedicine, the day-to-day administration ofthe program was given to private insurancecompanies, primarily Blue Cross and BlueShield plans. Under contract to the federalgovernment, they were authorized to handlemany duties – processing claims, reimbursingproviders for services, making local coverageand medical necessity decisions, and otheradministrative tasks. To this day, privatehealth insurers are responsible for mostMedicare administration; twenty-eight inter-mediaries administer Medicare Part A andtwenty carriers administer Medicare Part B.7

In addition to blunting criticism of govern-ment intrusion into private health care, thedecision to have private insurance companiesadminister Medicare was perceived to haveother important advantages. Private healthinsurers could implement Medicare rapidly,while the federal government had no existingadministrative apparatus to get the job done.Moreover, having Blue Cross and Blue Shieldplans administer the program meant that theprogram would be based on local practicesand customs, rather than under uniformstandards. At the time, that was thought tobe an advantage, because Medicare wouldnot cause dislocations in local medical prac-tice patterns. Local administration ofMedicare remains one of its defining charac-teristics. While some believe that local admin-

istration is still preferable, others believe thatits advantages are offset by fragmented infor-mation systems and inconsistent oversight ofmedical services and payments.

Taken together, these decisions were madeprimarily to assure a successful and rapidimplementation of Medicare. And they werelargely successful. As President LyndonJohnson predicted, “[Medicare] will take itsplace beside Social Security, and togetherthey will form the twin pillars of protectionupon which all our people can safely buildtheir lives and their hopes,” (DHHS 2000).

Over the years, however, as Medicare spend-ing grew, concerns were voiced aboutwhether SSA was the appropriate administra-tive home. Some thought that SSA lackedthe cost containment focus necessary to con-trol rising health spending. Suggestionsabout merging Medicare and Medicaidadministration also began to surface, in partbecause having two different federal agenciesadminister health programs (particularly sincesome people are enrolled in both programs)seemed increasingly less prudent. In addition,critics of the way Medicaid was administeredthought that it would benefit from the man-agement talent in SSA. In 1977, these discus-sions culminated in an executive branchdecision to take Medicare out of SSA, com-bine it with Medicaid, and create a newagency in the Department of Health,Education, and Welfare. The new agency wascalled the Health Care FinancingAdministration (HCFA).

24

7 Medicare Part A is financed by a payroll tax and covers inpatient hospital services, skilled nursing facility care,home health care, and hospice care. Part B is financed 75 percent from general revenues and 25 percent bypremiums paid by beneficiaries. It covers physicians’ services, laboratory services, durable medical equipment,other medical services, and a portion of home health care. Medicare Part C covers managed care and otherhealth plan choices. Part C does not have a separate revenue source; services furnished under Part C are fund-ed by transfers from the Medicare trust funds in proportion to the percentages of services covered by Parts Aand B.


The creation of HCFA influenced Medicare’sevolution in several important respects.Perhaps most importantly, it shiftedMedicare’s focus from management of asocial insurance program more to health carefinancing, raising the mission of cost contain-ment as another goal. In one area, however,creation of HCFA did not accomplish anintended objective. Full coordinationbetween Medicare and Medicaid did notoccur, despite the overlap in beneficiary pop-ulation and administrative functions.

The next structural event of real significancecame in 1997, when Administrator BruceVladeck implemented a large-scale reorganiza-tion. The primary thrust of the reorganizationwas to change the agency from a functionalorientation to be client- or customer-focused,with three discrete divisions: the Center forBeneficiary Services, the Center for HealthPlans and Providers, and the Center forMedicaid and State Operations. Some of thekey reasons for the reorganization were: toincrease emphasis on beneficiaries as clients,to unify Medicaid and State Operations inone unit, to provide a coherent structure toreplace one that had evolved without a centralplan, to meet administrative challenges associ-ated with evolution of the program such asincreased managed care, and to achieve amore integrated staff with greater collabora-tion across functional responsibilities.

The reorganization increased HCFA’s capa-bility to take on the new administrativeresponsibilities given to it in the BalancedBudget Act of 1997, including administra-tion of the Medicare+Choice program andthe State Children’s Health InsuranceProgram (SCHIP). It also assisted the agencyin becoming more responsive to beneficiaryinterests. As with any reorganization, it was

costly in terms of the disruptions and delaysat a time when the agency’s workload wasincreasing dramatically. During the threeyears following the reorganization, dissatis-faction about the agency’s overall perfor-mance persisted in the Congress and amongstakeholders, particularly providers. In gener-al, complaints about the reorganization cen-tered on confusion in identifying those withresponsibility in a given area, diffusion ofdecision-making, and transfer of staff mem-bers with particular expertise to other jobs.

The new Bush administration quickly under-took another internal reorganization andrenamed the agency the Centers forMedicare and Medicaid Services (CMS). Therationale for the name change was to betterreflect the mission of the agency and arenewed commitment to responsiveness tohealth care consumers and providers (DHHS2001b). The reorganization was made largelyon functional grounds, creating three centersdesigned to reflect the agency’s three lines ofwork: the Center for Beneficiary Choices,which is responsible for the Medicare+Choiceprogram and beneficiary education; theCenter for Medicare Management, whichmanages traditional FFS Medicare; and theCenter for Medicaid and State Operations,which handles all state-related programs andactivities run by the agency. One of the keyeffects of the reorganization was uniting allthe functions of Medicare+Choice, includingbeneficiary education, in one center. Becausethis reorganization was just implemented in June 2001, it is too early to evaluate itsperformance.

MEDICARE’S GOVERNANCE

CMS is the administrative home of theMedicare program. The Medicare program isin the jurisdiction of two committees in the

N a t i o n a l A c a d e m y o f S o c i a l I n s u r a n c e26

House of Representatives, and one in theSenate, with administrative funding underthe purview of appropriations committees.Other committees also hold oversight hear-ings, and Medicare is a frequent target ofstudy for GAO and the OIG in HHS.

Department of Health and Human Services

CMS is an operating agency in HHS. It hasapproximately 4,500 employees, about halfof whom are located in the agency’sBaltimore headquarters. A relatively smallnumber of staff is located in Washington,D.C. with the balance in tenregional offices. The Presidentnominates the head of the agency,the administrator, who is con-firmed by the Senate. The admin-istrator’s salary is established aslevel IV of the Executive PayScale, which is $130,000 for2002.

On paper, the relationship of theagency to the Secretary appears simple: theCMS administrator reports directly to theSecretary. However, the operational reality ismuch more complex. Although eachSecretary can organize the department anduse staff as he or she wishes, typically otheragencies are involved in decisions made byCMS. This is mainly because the agency’sscope is so broad and affects so many otherpeople and programs. The Secretary has anumber of staff divisions (defined as thosewithout responsibility for running programs)that advise the Secretary and usually play asignificant role in reviewing and approvingproposed actions by operating agencies,including CMS and other agencies. Thesestaff agencies include the Offices of theAssistant Secretaries for: Planning andEvaluation; Budget, Technology, and

Finance; Administration and Management;Public Affairs; Legislation; and Civil Rights.

Other agencies, such as the Office of theGeneral Counsel and the Surgeon General,also advise the Secretary. In addition, whenproposed actions affect other operating agen-cies, such as the Agency for Health CareResearch and Quality, the National Institutesfor Health, the Administration for Familiesand Children, and the Centers for DiseaseControl, they frequently participate in advis-ing the Secretary and “clearing” the pro-

posed action. While staff andoperating agencies within HHSoften render sage advice and fre-quently improve CMS’s decision-making, their involvementinevitably complicates and slowsdown the process.

In addition to review within theDepartment, most significant pro-posed actions by CMS, includingtestimony, legislative proposals,

and regulations, are reviewed by thePresident’s Office of Management andBudget (OMB) and by policy officials in theWhite House. Ultimately, the Secretary isaccountable to the President for all of CMS’actions. Given the visibility and importance ofhealth issues in the last decade, White Housestaff have taken the lead on many new pro-posals, and participated actively in most majorCMS actions.

Congress

Congress created Medicare in 1965 in TitleXVIII of the Social Security Act, and hasamended the law multiple times since then.In the House of Representatives, theCommittee on Ways and Means has jurisdic-tion over Medicare revenues and the

On paper, therelationship of the

agency to theSecretary appearssimple. However,the operationalreality is muchmore complex.


Medicare program.8 The House Committeeon Commerce has shared jurisdiction withthe Ways and Means Committee overMedicare Part B, the parts of Medicarewhere Parts A and B overlap, and Part C. Inthe Senate, the Committee on Finance hassole jurisdiction for the Medicare programand revenues. These committees are knownas the “authorizing” committees and areresponsible for legislative oversight ofMedicare. They hold hearings and proposechanges to Medicare eligibility, benefits, pay-ments, and coverage.

The House and Senate Budget Committees,through an annual budget resolution thatcovers all federal spending, recommend theoverall level of spending in the Medicare pro-gram for the following year. Through thebudget resolution, the Budget Committeesmay influence substantive Medicare policy. Inboth the House and the Senate, other com-mittees frequently hold hearings on Medicareissues, although they do not have legislativejurisdiction. In the Senate, these committeesinclude the Committees on: Aging; Health,Education, Labor and Pensions; andGovernmental Affairs. In the House, theCommittees on Government Reform andSmall Business, as well as the Subcommitteeon Oversight and Investigations of theCommittee on Commerce have all held hear-ings on Medicare. When these committeeshold hearings, agency officials are typicallyasked to testify and to produce informationfor the committee’s use. In particular, theSenate Special Committee on Aging has had

a strong interest in overseeing the Medicareprogram.

In addition to the committees that have juris-diction over the Medicare program, theAppropriations Committees in both theHouse and Senate have jurisdiction over theadministrative budget of CMS. Through theappropriations process, they enact legislationthat funds the operating costs of CMS. Theydo not have jurisdiction over the Medicareprogram itself, but they have occasionallyreported legislation on program issues.9

Although not unique to Medicare, the factthat the authorizing Committees enactchanges in the Medicare program, and theAppropriations Committees set the level offunding provided to carry out the tasks ofadministering the program, frequently causesa mismatch between the responsibilitiesassigned to CMS and the funds allocated toperform these duties.

Other Advisory or Oversight Agencies

In the 1980s, Congress created two non-par-tisan commissions to advise it on Medicareissues: the Prospective Payment AssessmentCommission on hospital and other institu-tional services, and later, the PhysicianPayment Review Commission on physicianissues. In 1997, the two commissions werecombined to form the Medicare PaymentAdvisory Commission (MedPAC). Throughtheir work, Congress has directed in-depthresearch and analyses of Medicare issues.Each year, Congress receives recommenda-tions from MedPAC on various Medicare

8 Having jurisdiction over a program means that a committee is authorized to report out legislation affecting theprogram. Committees without jurisdiction may hold hearings regarding a program over which they do not havejurisdiction, but cannot report out a bill.

9 Another way the Appropriations Committees have become involved in Medicare is by providing earmarkedfunds in the appropriations process for specific activities or projects.


payment and policy issues, someof which they have relied on toenact changes in Medicare law.

In addition to MedPAC and itsprecusors, Congress makes fre-quent use of its investigative arm,the GAO, to examine a widerange of policy and managementissues in Medicare governance.GAO initiates its work in responseto requests from Congressionalcommittees or individual mem-bers. Since 1995, GAO has published nearly200 documents (investigations, reports, ortestimony before Congress) dealing withMedicare program or administration issues.

In the executive branch, the OIG plays a veryinfluential role in overseeing Medicare andCMS. Established by law in 1976, the HHSOIG has a great deal of authority and auton-omy to audit, investigate, and supervise over-sight of HHS programs. Its mission is todetect and prevent waste, fraud, and abuse,and to assure that beneficiaries receive high-quality services at appropriate payment levels.The OIG reports to the Secretary of HHS,but the Secretary is specifically prohibitedfrom preventing the OIG from “initiating,carrying out, or completing any audit orinvestigation” (DHHS 2000a). In additionto its general authority, HIPAA gave theOIG authority to conduct investigations,audits, and evaluations about health carefraud, and to coordinate Federal, State, andlocal enforcement efforts targeting healthcare fraud. The OIG takes a very active rolein overseeing CMS. For example, it has acomprehensive work plan for 2002, underwhich it will evaluate or audit most aspects ofthe Medicare program (DHHS 2002).

RESPONSIBILITIES OF CMS

Medicare

Administering the second largestU.S. social program is an immensetask. As of October 2000, 1,006pages of law in the Social SecurityAct and 1,978 pages of regulationin the Code of FederalRegulations governed Medicare(CMS 2002b). In addition, theagency issues decisions and guid-ance through a wide variety of

documents: program memoranda, nationalcoverage decisions, operational policy letters(OPLs), and other letters.

Broadly, CMS’ key responsibilities in manag-ing the Medicare program include:

■ setting prices for what Medicare will pay for all services provided under theprogram;

■ managing approximately 50 contractorswho pay nearly one billion fee-for-ser-vice claims a year and perform otheradministrative tasks;

■ determining whether providers meet the qualifications for participating inMedicare, and taking actions againstproviders who fail to meet standards;

■ determining which new services andtechnologies Medicare should cover;

■ conducting quality control and programintegrity assurance activities;

■ providing information about Medicareto beneficiaries;

■ working with states to coordinateadministration of Medicare for benefi-ciaries also eligible for Medicaid; and

■ overseeing the 150 plans participatingin the Medicare+Choice program.

28

As of October2000, 1,006 pages

of law in theSocial Security Actand 1,978 pagesof regulation in

the Code ofFederal

Regulations gov-erned Medicare.

Within the scope of each of these broadresponsibilities, there are hundreds of tasks tobe performed. For example, each year CMSupdates the fees it pays to hospitals and otherinstitutions, physicians and other practition-ers, home health agencies, durable medicalequipment suppliers, community health cen-ters, rural health clinics, and managed careplans, among others. Medicare law generallyspecifies a different payment methodologyand methods for calculating payment updatesfor each type of provider.

Procedural requirements also play an impor-tant role in regulatory complexity. The needto comply with the Administrative ProcedureAct (APA) and other requirements estab-lished to ensure transparency in programdecision-making results not only in slow pro-mulgation of rules, but also the issuance ofregulations that are overly long, convoluted,and obscure in interpretation (Berenson2001). For example, the APA requires theagency to establish, in advance of making adecision, the criteria and standards by whichan administrative decision is to be made andto obtain comments on the specified factorsin advance. The end result of this is to effec-tively tie the agency’s hands in incorporatingnew information in the final rule or if it didnot anticipate key concerns prior to theirbeing raised in comments.

The purpose of the APA is to ensure that thegovernment does not act in an arbitrary andcapricious way, and that the public has anopportunity to participate in government. Itis one of the hallmarks of democracy. Whilefew would want to alter fundamentally thenature of our democracy, these processes doslow government agencies down. Unlike theprivate sector, government agencies are limit-

ed in the extent to which they can be nimbleand quickly respond to changes.

Responsibilities Not Related to Medicare

In addition to administering Medicare, CMShas a host of other significant responsibilities,including:

■ working with the states to administerMedicaid and the SCHIP;

■ enforcing the Clinical LaboratoryImprovement Act (CLIA); and

■ implementing the non-Medicare partsof HIPAA, including health insuranceportability and administrative simplification.

GROWTH IN RESPONSIBILITIESSINCE 1996

Since 1996, Congress has increased dramati-cally both CMS’ responsibilities and work-load, starting with the enactment of HIPAA.Since this time, Congress has enacted foursignificant pieces of legislation which havehad a profound effect on Medicare: HIPAA;the BBA of 1997; the BBRA of 1999; andthe Medicare, Medicaid, and SCHIP BenefitsImprovement and Protection Act (BIPA) of2000.

The Health Insurance Portability andAccountability Act (HIPAA) of 1996

HIPAA is best known for its provisions toguarantee the availability and renewability ofprivate health insurance, and its eliminationof pre-existing condition limitations for thosewith continuous health insurance coverage.But the law also had far-reaching effects onMedicare’s fraud and abuse preventionefforts, and on revising electronic healthinformation transactions standards.


Under the health insurance portability provi-sions, states were given the primary responsi-bility for enforcing requirements on insurersthat issue group and individual health insur-ance, but the Secretary of HHS was given“fallback” enforcement authority if the statesfail to act. Following the Medigap model,HCFA was given enforcement responsibility.This is noteworthy because this enforcementresponsibility expanded the agency’s respon-sibilities to matters unrelated to Medicare orMedicaid. At the time, the agency had virtu-ally no experience in this arena, and had totrain staff for these additional responsibilitieswithout new funding. In conjunction withthe Departments of Labor and Treasury,CMS published an enforcement regulation,and is currently enforcing all the HIPAAstandards in one state, and individual require-ments in six states.10

In HIPAA, Congress also dramaticallyincreased attention to, and funding for, fraudand abuse prevention activities, both inHCFA and in investigative and law enforce-ment agencies. Within HCFA, it created theMedicare Integrity Program, and directedHCFA to contract with special program safe-guard contractors to reduce fraud, waste, andabuse. In an unusual move, Congress direct-ed mandatory appropriations from the Part Atrust fund for these contractors. Congressalso directed mandatory appropriations fromthe trust fund to the HHS Inspector Generaland the Department of Justice to investigateand prosecute Medicare fraud and abuse.

In addition, HIPAA contained a number ofprovisions broadly described as “Administra-

tive Simplification.” The goal of these provi-sions was to improve and standardize all elec-tronic health transactions by:

■ requiring a uniform format and coding for submission of health claims information;

■ establishing unique identifiers for individuals, employers, health plans, and health care providers; and

■ establishing standards for both the security and privacy of personal healthinformation.11

Within HHS, CMS has the lead responsibili-ty for working with industry groups to devel-op and implement the administrativesimplification requirements, except the priva-cy rule. The agency has published four pro-posed or final regulations, and five remain.When these provisions were enacted, fewappreciated their breadth, scope, and themyriad and complex issues that would arisein developing and implementing these stan-dards. When fully implemented, they willhave far-reaching effects on all payers andproviders in how health care business transac-tions are conducted.

The Balanced Budget Act of 1997 (BBA)

In 1997, Congress enacted the BBA, whosemain purpose and accomplishment was elimi-nating the federal deficit for the first timesince 1969. Medicare’s contribution to bal-ancing the budget was substantial. From FY1998-2002, Medicare spending was reducedby an estimated $115 billion, which CBOestimated would reduce the rate of growth inMedicare spending from 8.8 percent a year


10 The individual requirements were enacted in a later amendment to HIPAA, the Women’s Health and Cancer Act.

11 The individual identifier rule was put "on hold" because it evoked too much controversy.

to 5.5 percent. Most of the reductions wereachieved by reducing the rate of increase inpayments for almost every type of Medicareservice.

The BBA was enacted after more than twoyears of intense debate in Congress aboutwhether Medicare should bereformed, and whether HCFAshould be restructured. In theend, Congress decided that itsfirst priority was balancing thebudget. Thus, the BBA did notinclude the fundamental reform ofMedicare that some had advocat-ed, nor did it restructure HCFA,although both issues remained onthe Congressional agenda. Nonetheless, BBAmade significant changes to Medicare lawand expanded HCFA’s responsibilities. Moreimportantly, the size and scope of thechanges Congress passed dramaticallyincreased HCFA’s workload. In terms ofincreased responsibilities, the implementationof the SCHIP, while not a Medicare pro-gram, posed significant challenges for theagency.

For Medicare, the biggest change was thecreation of Medicare Part C: Medicare+Choice (M+C). Congress added four newoptions to the existing array of qualifiedMedicare managed care plans: provider-sponsored organizations (PSOs), preferredprovider organizations (PPOs), private fee-for-service plans (private FFS), and a medicalsavings account (MSA) demonstration com-bined with a high deductible insurance plan.Each new type of plan required implement-ing instructions and rules. Moreover, theBBA substantially revised the operating rulesfor managed care plans. Medicare Part C alsocharged HCFA with creating a comprehen-sive beneficiary education campaign, includ-

ing a handbook, annual health fair, toll-freetelephone number, and comparisons of M+Cplans by service area.

The new tasks for the FFS (traditional)Medicare were also formidable. BBA directedHCFA to implement four new prospective

payment systems (for skilled nurs-ing facilities, home health agen-cies, outpatient hospitaldepartments, and rehabilitationhospitals), and implement orexpand coverage for several pre-ventive benefits (includingprostate cancer screening tests,mammography, screening pelvicexams, colorectal screening, bone

mass measurement, and diabetes self-man-agement training).

Both from analytic and operational perspec-tives, implementing the BBA was a dauntingtask. By CMS’ count, the BBA contained359 provisions that required agency action.While HCFA had considerable expertise withpayment rate reductions, it still had to issueregulations and write and transmit imple-menting instructions to intermediaries andcarriers, who, in turn, would reprogram sys-tems and inform providers of the changes.

Implementing new prospective payment systems was a far more complex task thanreducing payment updates, and was mademore difficult by the fact that four new pay-ment systems were mandated at the sametime. Sophisticated design and analytic work,typically occurring over several years, are thefoundations for any new payment system.HCFA had laid the groundwork for most ofthe payment systems, but intensive work wasstill needed on the design phases. On theoperational side, implementing a new pay-ment system requires giving detailed instruc-


Both from analyticand operational

perspectives,implementing the

BBA was a daunting task.

tions to the intermediaries or carriers, andmaking multi-faceted changes to claims processing systems.

Complicating the implementation of the newsystems were hundreds of archaic informa-tion systems. Readying these “legacy” sys-tems to operate after 2000 caused a majordisruption in HCFA’s implementation of theBBA. After an analysis of risks and benefits,the agency decided that it had to postponeall information systems changes in order toensure that claims could be paid after January2000. As a result, the skilled nursing facilitypayment system was the only one of the fourimplemented as scheduled on July 1, 1998.Implementation of the other three paymentsystems, as well as a number of other FFSprovisions of the BBA, was delayed.

The Balanced Budget Refinement Act of1999 (BBRA)

The primary purpose of the Medicare BBAprovisions was to slow the rate of growth inMedicare spending in order to help balancethe federal budget. But in the two years fol-lowing its enactment, Medicare spending wassharply lower than predicted. In FY 1998,Medicare spending grew by only 1.5 percent.In FY 1999, Medicare spending actuallydeclined for the first time in its history.Medicare outlays were almost 1 percentlower than the previous year. In March 1999,CBO revised its budget projections, and low-ered its estimates of Medicare spending by$80 billion over 5 years. And, in July 1999,CBO projected further reductions inMedicare spending (CRS 2001). Most stake-holders, citing a record surplus, argued thatCongress had actually made cuts in Medicarespending far deeper than necessary to balance

the budget. While most analysts pointed tocontributory effects of other factors, such aschanges in CBO’s economic estimates andthe effects of increased fraud and abuse pre-vention and detection efforts, the precipitousdecline in spending was cause for concern(CRS 2001). Most providers lobbiedCongress for increased payments, maintain-ing that their ability to continue providingcare was threatened. While GAO could findlittle conclusive evidence that Medicare bene-ficiaries’ access to care was eroding, Congresstook the fall-off in Medicare spending seriously.

In 1999, it enacted the BBRA, primarily topartially restore some BBA reductions, butalso to refine some of the BBA’s provisionsrelating to prospective payment systems.CBO estimated that the BBRA wouldincrease Medicare spending by $16 billionover 5 years, with about seventy-five percentof the additional spending targeted to hospi-tals, skilled nursing facilities, home healthagencies, and M+C plans (CRS 2001). Whilethe BBRA contained fewer changes in lawthan the BBA (126 in the BBRA, comparedto 359 in the BBA), implementation stillposed real operational challenges to HCFA,especially in light of delays caused by Year2000 systems issues (GAO 2000). For exam-ple, the Blue Cross and Blue ShieldAssociation reported that Medicare contrac-tors received 719 formal instructions(“change orders”) from HCFA for systemschanges in 2000, more than 2.5 times asmany as in 1998, before the Year 2000 sys-tems moratorium was imposed. While the1999 moratorium on systems changes proba-bly made the 2000 number higher than itotherwise would have been, it nonethelessindicates the workload that both the agency


and the contractors faced in implementingthe BBA and the BBRA (GAO 2001a).

The Medicare, Medicaid and SCHIP BenefitsImprovement and Protection Act of 2000(BIPA)

After the enactment of the BBRA, CBO’sprojections showed much slower rates ofgrowth in Medicare spending than previouslyprojected. In July 2000, CBO’sestimate of Medicare spendingwas more than 20 percent lowerthan it had projected prior toenactment of the BBA. CBO nowprojected that Medicare spendingwould grow at an average annualrate of 7.5 percent from 2001 to2005, compared to 9.4 percentprior to the BBA. These projec-tions fueled an ongoing debate that the BBAMedicare reductions were too deep. Inresponse, Congress enacted the Medicare,Medicaid, and SCHIP Benefits Improvementand Protection Act of 2000 (BIPA). CBOestimated the cost of the legislation at $32.3

billion over 5 years. Most of the bill’s provi-sions further increased payments to Medicareproviders, with the largest increase, $11.2billion over 5 years, going to M+C in anattempt to stem plan withdrawals from theprogram. BIPA also expedited the Medicareappeals process, and required the Secretary toconduct outreach activities to inform benefi-ciaries, providers, and others of their rights.

After enactment, HCFA deter-mined that BIPA had 152 provi-sions requiring agency action toimplement.

Taken together, the range andscope of the new responsibilitiesgiven to CMS since 1996 areextraordinary. While many havebeen critical of the agency’s inabil-

ity to implement all these changes quickly,the study panel thinks it is important toremember that all of these tasks were givento an agency already charged with managingan already exceedingly complex program in afluid and rapidly changing health care system.


The range andscope of the newresponsibilitiesgiven to CMSsince 1996 areextraordinary.

N a t i o n a l A c a d e m y o f S o c i a l I n s u r a n c e34 N a t i o n a l A c a d e m y o f S o c i a l I n s u r a n c e

By virtue of its size, complexity, and impor-tance, Medicare commands the attention ofCongress and policy-makers. In the last sev-eral years, Medicare has faced even morescrutiny as the baby boom generationapproaches Medicare eligibility. The impend-ing and steep increase in the number of ben-eficiaries has led to a serious debate aboutwhether the current Medicare program isfinancially sustainable in the long run. Thequestion at the heart of that debate iswhether Medicare should continue as a socialinsurance program with defined benefits.Some have proposed means testing, whileothers have proposed moving toward a pre-mium support or defined contribution strate-gy. Greater use of managed care for Medicarebeneficiaries would be an integral part ofsuch reform proposals. In some people’sview, the current governance and manage-ment structure has a bias toward the tradi-tional fee-for-service program and does notencourage enrollment in managed care plans.

Philosophical differences about what kind ofprogram Medicare should be inevitably colorconsiderations about how well the program iscurrently administered. The panel under-stands that Medicare governance and man-agement may need to change substantially ifthe program is restructured and that the cur-rent structure might not be well-suited to anorganization with a different mission. Butsince Congress has not yet acted to restruc-ture Medicare, the panel focused on makingthe current Medicare program work better,rather than speculate about what type of gov-ernance structure might be best suited to adifferent type of Medicare program.

SOME GENERAL OBSERVATIONS

Most discussion about Medicare’s gover-nance and management focuses on its short-comings or perceived failures. While much ofthe criticism has a basis in fact, the panel iskeenly aware of how important Medicare isin the lives of elderly and disabled Americans,and emphasizes that its intent is not toundermine Medicare, but only to make itstronger.

The panel also recognizes Medicare’sachievements. By any measure, Medicaremust be judged successful in accomplishingits core mission: providing health insuranceto elderly and disabled Americans. It is themost cost-effective health insurer in thecountry. Medicare processes nearly a billionclaims a year, and pays its claims faster thanany other insurer, and at a lower cost. Thecosts for processing Medicare claims isapproximately $1 to $2 per claim, far lowerthan the $6 to $10 costs per claim for privateinsurers (GAO 2001b). Furthermore,Medicare administrative costs are far lowerthan those of private insurers. In fiscal year2000, HCFA’s administrative costs were lessthan 1 percent of benefits paid for Part A and2 percent for Part B. By comparison, BlueCross/Blue Shield Association plans’ admin-istrative costs were about 12.2 percent in1998 and other commercial insurers’ costscan be as much as 25 percent of benefit costs(GAO 2000).

Other aspects of the program must be con-sidered strengths as well. Medicare generatesa great deal of data that provide the basis forimportant health services research. Such data


Chapter 3:Issues in Medicare Management

include information on beneficiary access tocare, service use, and out-of-pocket spend-ing, derived from the annual MedicareCurrent Beneficiary Survey (Adler 1994).Studies conducted by health servicesresearchers and policy analysts using thesedata are used to help improve the financingand delivery of care for all Americans. Forexample, Medicare data served as the mainsource of information used in groundbreak-ing research on variations in medical practiceand health outcomes. Similarly, research,demonstrations, and evaluations that are con-ducted as a part of Medicare program man-agement provide information used toimprove care for privately insured and unin-sured Americans. Also, the program stands asa model of integrity in important respects.Despite hundreds of billions of dollars paidby the program since its inception, no evi-dence of corruption internal to the agencyhas ever been produced.

Although the panel recognizes Medicare’ssuccess in accomplishing its core mission, italso explored areas in which management ofthe program has been found wanting. Criticshave charged that the agency does not imple-ment new provisions of law in a timely fash-ion, adequately oversee its contractors,manage its information systems well, use ameasured approach in pursuing fraud andabuse, communicate well or simply with ben-eficiaries, or respond quickly to changingmarket conditions. The agency is alsothought to suffer from a lack of continuity inleadership and an overly insulated staff thatdoes not have adequate experience or train-ing to administer such a complex program.Others have said that Congressional micro-management, in the form of overly specific

laws and conflicting priorities, has kept CMSfrom functioning as effectively as it could.

While each of these issues will be discussed,the panel generally concludes that many ofMedicare’s shortcomings stem from insuffi-cient resources.

RESOURCES NOT COMMENSURATEWITH RESPONSIBILITIES

Table 1 shows Medicare’s appropriations toCMS for program management, benefit out-lays, claims volume, FTEs, and contractemployees from FY 1992 through 2002.12

Figure 1 shows the same data. In inflation-adjusted (real) dollars, benefit outlays haveincreased 97 percent and claims volume hasincreased 50 percent. However, programmanagement appropriations have increasedonly 26 percent, while the number of FTEshas increased 12 percent. Growth in thenumber of contractor employers has beeneven smaller, at 6 percent. During that peri-od, great efficiencies were achieved throughautomation of claims, but these data reveal aserious mismatch between the agency’sresponsibilities and the resources allocated tofulfill them. The mismatch has been particu-larly acute since the passage of HIPAA. Asshown in Figure 1 and discussed earlier, boththe magnitude and scope of responsibilitiesgiven to CMS have grown enormously, whilethe size of the staff has increased only mod-estly. The breadth of those new responsibili-ties, especially those totally unrelated toMedicare, such as the health insurance andadministrative simplification provisions ofHIPAA and the State Child Health InsuranceProgram in the BBA, have posed exceptionalchallenges to the agency. Some of the new


12 FTEs include all agency employees; approximately 400 employees are assigned to Medicaid.


Tabl

e 1

Prog

ram

Gro

wth

vs.

Cha

nge

in A

dmin

istr

ativ

e R

esou

rces

Fisc

al Y

ear

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Tota

l Adm

inis

trat

ive

Fund

ing

(Rea

l $ in

mil.

)1,

941.

0 1,

746.

6 1,

799.

2 1,

787.

1 1,

728.

0 1,

734.

4 1,

788.

9 1,

945.

1 1,

996.

3 2,

241.

6 2,

437.

1

Cum

ulat

ive

% C

hang

e

(Sin

ce F

Y19

92)

0.0%

-10.

0%-7

.3%

-7.9

%-1

1.0%

-10.

6%-7

.8%

0.2%

2.8%

15.5

%25

.6%

Med

icar

e O

pera

tions

(R

eal $

in m

il.)

1,38

0.9

1,19

6.3

1,22

4.5

1,21

3.3

1,20

1.4

1,20

7.2

1,21

6.1

1,26

5.1

1,23

9.0

1,35

6.4

1,53

4.0

Cum

ulat

ive

%

Cha

nge

(Sin

ce F

Y19

92)

0.0%

-13.

4%2.

4%-1

.0%

-1.0

%0.

5%1.

0%4.

0%-2

.0%

9.5%

13.0

%

Prog

ram

Mgm

t. A

ppro

p. (

Rea

l $ in

mil.

)56

0.1

550.

3 57

4.7

573.

8 52

6.6

527.

2 57

2.8

680.

0 75

7.4

885.

1 90

3.1

Cum

ulat

ive

% C

hang

e

(Sin

ce F

Y19

92)

0.0%

-1.7

%4.

4%0.

2%-8

.2%

0.1%

8.6%

18.7

%11

.4%

16.9

%2.

0%

Ben

efits

Out

lays

(R

eal $

in m

illio

ns)

196,

400.

021

7,30

0.0

238,

100.

026

2,30

0.0

279,

300.

0 29

8,30

0.0

306,

500.

031

1,50

0.0

327,

900.

036

4,74

2.0

386,

069.

0

Cum

ulat

ive

% C

hang

e

(Sin

ce F

Y19

92)

0.0%

10.6

%21

.2%

33.6

%42

.2%

51.9

%56

.1%

58.6

%67

.0%

85.7

%96

.6%

Med

icar

e C

laim

s V

olum

e (in

mill

ions

)64

7.9

684.

573

5.7

779.

680

7.7

842.

785

9.8

867.

489

193

0.6

970

Cum

ulat

ive

% C

hang

e

(Sin

ce F

Y19

92)

0.0%

5.6%

13.6

%20

.3%

24.7

%30

.1%

32.7

%33

.9%

37.5

%43

.6%

49.7

%

FTE

Con

sum

ptio

n4,

147

4,23

6 4,

119

4,09

9 4,

081

3,97

9 3,

942

4,21

9 4,

446

4,58

3 4,

632

Cum

ulat

ive

% C

hang

e

(Sin

ce F

Y19

92)

0.0%

2.1%

-0.7

%-1

.2%

-1.6

%-4

.1%

-4.9

%1.

7%7.

2%10

.5%

11.7

%

Not

e: T

otal

adm

inis

trativ

e fu

ndin

g is

the

sum

of M

edic

are

Ope

ratio

ns (t

he v

ast m

ajor

ity o

f whi

ch is

for

cont

ract

or m

anag

emen

t) an

d Pr

ogra

mM

anag

emen

t Fun

ds.

Sour

ce: O

ffice

of F

inan

cial

Man

agem

ent C

ente

rs fo

r M

edic

are

and

Med

icai

d Se

rvic

es, 2

002.


GROWTH IN CMS RESPONSIBILITIES

HIPAA – 1996

■ "Fallback" enforcement of private health insurance provisions

■ Medicare Integrity Program, including new program safeguard contracts

■ Administrative Simplification to improve and standardize all electronic healthtransactions (9 regulations in all) including:

❑ Uniform formats for coding of health claims information

❑ Unique identifiers for individuals, employers, health plans, and health care providers

❑ Standards for the security and privacy of personal health information

BBA – 1997

■ Medicare+Choice, including four new options (PSOs, PPOs, Private FFS, and MSA demonstration)

■ Medicare Education Program, including handbook with local comparative information, 1-800-MEDICARE phone line, www.Medicare.gov, and regionalhealth fairs about Medicare choices

■ State Child Health Insurance Program

■ Four new prospective payment systems (skilled nursing facilities, home healthagencies, hospital outpatient services, and rehabilitation hospitals)

■ Payment reductions (requiring regulations) for almost all Medicare providers

BBRA – 1999

■ Refinement of prospective payment systems

■ Partial restoration of BBA payment reductions for most Medicare providers

BIPA – 2000

■ Further changes to payment systems for most Medicare providers

■ Changes to Medicare appeals process and outreach activities


tasks related to Medicare, such as theMedicare Education Program and the newprovider types in the BBA have been veryresource-intensive. In addition, funding tocontractors, who implement changes throughinformation systems changes and instructionsto providers, has not nearly kept pace withthe additional work given them.

In January 1999, three former administrators(Leonard Schaeffer, William Roper, and GailWilensky) joined a number of health policyexperts and advocates in writing an open let-ter to Congress and the Executive about alooming crisis at HCFA due to insufficienthuman and financial resources. They said,“Over the past decade Congress has directedthe agency to implement, administer, andregulate an increasing number of programsthat derive from highly complex legislation.

While vast new responsibilities have beenadded to its workload, some of its most capa-ble administrative talent has departed orretired…At the same time, neitherDemocratic or Republican administrationshave requested administrative budgets of asize that were in any way commensurate withHCFA’s growing challenge…no privateinsurer would ever attempt to manage suchlarge and complex insurance programs withso small an administrative budget” (Butler1999).

CONGRESSIONALMICROMANAGEMENT

Over time, Congress has become increasinglyinvolved in Medicare. In the 1970s, thenumber of Congressional staff working onMedicare began to grow, signaling growing

Figure 1

Program Growth vs. Change in Administrative Resources

-20%

0%

20%

40%

60%

80%

100%

120%

FTE ConsumptionMedicare Claims Volume (in millions)Benefits Outlays (Real $ in mil.)Program Mgmt. Approp. (Real $ in mil.)Medicare Operations (Real $ in mil.)

20022001200019991998199719961995199419931992

HIPAA

BBABBRA

BIPA

Source: Office of Financial Management, Centers for Medicare and Medicaid Services, 2002.

Congressional interest. In 1974, the enact-ment of the Congressional Budget andImpoundment Control Act of 1974 was apivotal event, increasing Congressional powerover the budget. Prior to its enactment,Congress had no overall framework to devel-op its own spending priorities and had to relyon the Office of Management and Budget(OMB) for budget information, cost esti-mates, and forecasts. The 1974 Act estab-lished procedures for Congress to develop anannual Congressional budget. It establishedBudget Committees in the House andSenate, gave them authority to draftCongress’ budget, and created the Congres-sional Budget Office (CBO), which gaveCongress an independent and influentialsource of information on budget issues and the ability to generate its own cost esti-mates.13

In the 1980s, Congress began to write moredetailed laws, beginning with the passage ofthe prospective payment system for inpatienthospital services in 1983. However, prior tothe early 1990s, health care policy did notoccupy as prominent a position in theCongressional agenda, and was not foremostin the minds of most Americans. The presi-dential campaign of 1992 and the Clintonhealth care reform plan brought Medicareand health care issues to center stage in boththe Congress and the minds of the Americanpeople. Since that time, Congress has beenmuch more involved in Medicare, althoughits focus has shifted from comprehensivehealth system reform, first to deficit reduc-tion, and then to restructuring Medicare. In1995, Congress passed a balanced budget billthat would have reduced Medicare spending

by $270 billion over 5 years and added newhealth plan options to the program. Presi-dent Clinton vetoed that bill. Since that time,Congress has passed four significant pieces ofhealth care legislation and has also consideredMedicare reform and prescription drug cov-erage. Enactment of these laws placed aheavy burden on CMS. Many provisionscontained very detailed specifications thatrequired extensive action to implement. TheBBA had 359 provisions to implement,BBRA 126, and BIPA 152.

In addition to enacting detailed legislation,Congress is also very involved in agency mat-ters on an ongoing basis. Congressional com-mittees, including not just authorizing andappropriating committees, but also oversightcommittees, have held scores of hearings,which require significant preparation on thepart of administration witnesses. Congresshas also requested a very large number ofGAO reports on Medicare, to which theagency typically issues a formal response.Moreover, the volume of telephone calls andletters to the agency from members ofCongress has increased over time; respondingto them on a timely basis has proved to be asignificant challenge for the agency. In 2000,the HCFA Administrator told the SenateFinance Committee that the agency receivedan average of 700 letters a month frommembers of Congress, not including lettersthat go directly to Medicare contractors(DeParle 2000).

Both the amount and specificity ofCongressional action have raised questionsabout whether Congress is micromanagingMedicare. Even some members of Congress


13 The Act also limited the President’s authority to impound (or withhold from federal agencies) funds appropriat-ed by Congress.

believe that they have become too involvedin Medicare issues. Senators Breaux and Fristhave offered legislation to “depoliticize”Medicare by creating a Medicare Board toresolve contentious issues, in the hope thatthe Board would allow members of Congressto refer some controversial issues, such asMedicare benefits and coverage, to theboard, rather than becoming directlyinvolved. However, some doubtthat such an approach would besuccessful because members willalways be called upon to intercedein matters affecting their district.

Keeping in mind Medicare’simportance, a fairly high level ofCongressional involvement seemsappropriate. In the study panel’sview, Congressional oversight ofMedicare is part of their fiduciary responsibil-ity to both taxpayers and beneficiaries.However, the panel also wanted to under-stand why Congres-sional involvement inMedicare has grown so much in recent yearsin order to assess whether their involvementis hindering effective management of theprogram or draining agency resources thatwould better be spent on program management.

The Budget Reconciliation Process

Over the years, Medicare law has becomeincreasingly specific. A critical contributor toincreased specificity is the role of “scoring” inthe budget reconciliation process. In thatprocess, Congress passes a budget resolutionto determine government revenue andspending for the next fiscal year. The budgetresolution establishes budget targets for com-mittees, and directs the committees to reportback legislation meeting those targets. Afterthe committees report their respective bills,

the budget committees combine all the pro-visions into an omnibus reconciliation bill.These bills cover a multi-year period,although typically Congress intervenes byenacting legislation in the intervening years.

CBO plays a critical role in this process. Itassigns a cost estimate or savings estimate(called the score) to each provision. CBO is

unwilling to score provisionsunless they specify how savings (orspending) will be achieved. Theresult is that Medicare law hasbecome very detailed. Unless thebudget reconciliation process ischanged or CBO changes its scor-ing conventions, both of whichseem unlikely, future laws are like-ly to be just as specific, since theytypically amend existing law.

Further, for the degree of specificity todiminish markedly in the future, Congresswould probably have to repeal, or at leastreduce, some of the specificity in existing law.

Other Reasons for Increased Specificity in Law

In addition to the budget scoring rules,other factors affect how deeply Congress getsinvolved in Medicare law and administration.Congress has not always trusted the adminis-tration to implement the law in accordancewith its wishes. Sometimes, but not always,the mistrust has been partisan, when oneparty controls the White House and theother one, or both, Houses of Congress.Making the law more specific gives theadministration less latitude to exercise discre-tion in implementation and gives Congressgreater assurance that its intent will be imple-mented. However, Congress is not the onlyactor driving greater specificity in the law.Given the importance of Medicare to health


Both the amountand specificity of

Congressionalaction have raisedquestions about

whether Congressis micromanaging

Medicare.

care industry and the national economy,health care providers have also lobbiedCongress to enact laws with greater specificity.

The study panel concurs with the view thatlaws passed in recent years have been too pre-scriptive. On occasion, members of Congresshave even asked the administration not toimplement the law exactly the way it waswritten because of unforeseen consequences.For example, the Bush administration recent-ly tried to change some elements of theMedicare beneficiary education program toconform to changes in the M+C program,but was prevented from doing so. The courtruled that the education campaign had to beconducted in accordance with the law, whichwas very specific about both the content andtiming of the campaign (Gray Panthers v.Thompson 2001). In another example, theadministration was required to implement a5.4 percent reduction in payments to physi-cians for 2002 because it had no flexibility toalter the formula in law. Many members ofCongress, as well as physician organizations,asked the administration to interpret the lawdifferently, so that the reduction would not beimplemented, but the law was written in sucha way that the administration felt no otherinterpretation would be legally sustainable.

The study panel believes that Congressshould be involved in oversight of Medicareby setting priorities for Medicare, determiningits future, overseeing its operations, and hold-ing CMS accountable for performance objec-tives. The panel does not subscribe to theview that Congress should not be involved inMedicare oversight. However, it is clear thatboth the number and highly specific contentof laws passed in recent years have severelytaxed the agency’s ability to comply with the

requirements imposed on it. The study panelthinks that the agency would benefit fromsome respite in implementing new laws andfrom greater administrative flexibility. Perhapseven more importantly, the study panelbelieves that both the agency and Congresswould benefit from a greater sense of trustand comity, and urges a public dialogue onhow that might be accomplished.

INABILITY TO IMPLEMENT LAWS ON TIME

Beginning with the passage of HIPAA, enact-ment of major pieces of legislation in most ofthe ensuing years has severely taxed theagency, compromising its ability to performongoing work while implementing the newprovisions. Even without the additionalresponsibilities in recent years, Medicare is anexceedingly complex program with equallycomplex administrative tasks. Not includingthe provisions of HIPAA, the agency report-ed that these laws included 637 provisionsthat required agency action. Some of theseprovisions, such as the reductions in pay-ments to providers, were routine or relative-ly simple. Even so, the agency is required to publish regulations, which are time-consuming, to implement provisions of law.Other provisions in these laws, such as imple-menting new prospective payment systems,required extensive design and analytic work,followed by the regulatory process. In addi-tion, some of the new responsibilities, such asthe health insurance portability and adminis-trative simplification provisions of HIPAAand the new SCHIP in the BBA were notdirectly related to Medicare and requiredextensive agency resources to implement.

In its strategic plan for 2002, the agencyreported that it had implemented 75 percentof the BBA, 80 percent of the BBRA, and 15



percent of the BIPA.14 While other factors,such as the Year 2000-related delay, clearlyimpeded the agency’s ability to implementthese laws in the timeframes required byCongress, the panel notes that the sheer vol-ume of changes would have presented adaunting challenge to any agency, even withresources adequate to the task.

POOR OVERSIGHT OFCONTRACTORS

Contractors perform most of the actual workof administering Medicare. There are 28intermediaries for Part A, 20 carriers for PartB, and 19 program safeguard contractors.The contractors currently employ approxi-mately 22,500 employees, nearly five times asmany as CMS. Contractor duties include thefollowing:

■ claims processing (receiving claims andmaking decisions about which servicesshould be covered, paying appropriateclaims, taking action to identify inap-propriate or fraudulent claims, andwithholding payment or collecting over-payments);

■ payment safeguards (additional activitiesto ensure that payments are proper,including medical review, audits, andinvestigations by fraud units);

■ fiscal responsibility (actions to ensure afull and accurate reporting of Medicareaccounts receivable);

■ services to beneficiaries (including reso-lution of claims disputes);

■ services to providers, including provid-ing them information about payment

and coverage system changes, instruct-ing them how to submit claims, andcustomer service in resolving billing andother problems; and,

■ administrative duties.15

Over the years, both OIG and the GAO havebeen particularly critical of the agency’s over-sight of contractors. Since 1996, the OIGhas conducted annual audits of FFS claims toestimate the extent to which payments didnot comply with Medicare laws and regula-tions. For FY 2000, the latest year for whichdata are available, the OIG estimated thatabout 6.8 percent, or $11.9 billion, of the$173.6 in FFS claims processed was improp-er (Mangano 2001). These improper pay-ments, referred to as the error rate, consistof:

■ medically unnecessary services;

■ unsupported services (those for whichinsufficient documentation is found inthe medical records);

■ coding errors (services or procedures forwhich lower reimbursement shouldhave been paid); and

■ non-covered services (payment wasmade for services that do not complywith Medicare law or regulation).

The error rate has sometimes been misidenti-fied as a measure of fraud and abuse. It isimportant to note that not all of the errorsrepresent efforts to defraud or abuse the pro-gram. For example, what is included in theerror rate reflects simple coding errors or lackof documentation for appropriate services. In

14 The agency did not keep records of the number of provisions in HIPAA.

15 The description of these duties is derived from testimony delivered by Michael Mangano, Acting InspectorGeneral, to the House Ways and Means Committee on June 28, 2001.


any event, the error rate reflects inaccurate orincomplete billing or documentation, andmeasures claims that were paid when theyshould not have been. While equating theerror rate with fraud and abuse is too simplis-tic; it is appropriate to consider the error rateas a reflection of inadequate oversight by thecontractors and CMS.

In the OIG’s estimation, contractors’ claimssystems were generally adequate to determineboth beneficiary and provider Medicare eligi-bility, price claims correctly, and ensure thatthe services billed were allowed underMedicare rules. However, the OIG said thatthe contractors’ controls were inadequate todetect the types of errors described above,which were detected by having medical pro-fessionals review beneficiary medical records.While the OIG views the error rate as anindicator that CMS needs to strengthen itsoversight and control over contractors, itcredits CMS for cutting the error rate byabout half, from 14 percent in 1996 to 7percent in 2000.

Besides the error rate, there are other indica-tors of poor contractor oversight. Severalcontractors defrauded the government or set-tled cases alleging fraud for hundreds of mil-lions of dollars in the 1990s (GAO 2001c).The allegations included deleting or destroy-ing claims, failing to conduct proper audits,falsifying documentation for medical claims,falsifying performance measures to evaluatetheir performance, and switching off toll-free phone lines designed to assist benefi-ciaries.16 What made these circumstancesmore troubling, according to the GAO, isthat they were not discovered by the agency

during routine oversight, but were reportedby whistleblowers.

Since 1993, CMS has entered into settle-ments with 14 Medicare contractors, withsettlements exceeding $350 million. In con-junction with some of these settlements, theOIG has imposed eight corporate integrityagreements, which stipulate mandatory com-pliance and reporting requirements agreed toby the contractors to avoid exclusion ordebarment from Medicare. Two other con-tractors have pled guilty to obstructing feder-al audits. In June 2001, the OIG reportedthat it had 24 former or current contractorsunder active investigation.

GAO has also studied contractor perfor-mance in providing information and servicesto health care providers (GAO 2001c). Inreviewing ten contractor-issued bulletins (let-ters to physicians informing them of changesin national and local Medicare policy), GAOfound that some of the bulletins containedoverly technical and legalistic language andomitted some information about mandatorybilling procedures. GAO also found that 85percent of the calls to the telephone call cen-ters were answered either incompletely orinaccurately.

Despite continuing problems, both the OIGand GAO credit the agency with improvedoversight of contractors in the last few years.CMS has appointed a management boardcomprised of senior executives to overseecontractor performance. It has also separatedcontractor management from contractor eval-uation functions, and assigned additional staffto monitor and oversee contractors.However, both OIG and GAO still find

16 This discussion is derived from the June 28, 2001 testimony of Acting Inspector General Michael Mangano.

problems with financial management andaccounting procedures.

In part, the difficulties CMS has in oversee-ing contractors stem from legal restrictions inits contracting authority.17 Under theCompetition in Contracting Act and itsimplementing regulations, knownas the Federal AcquisitionRegulation (FAR), most federalagencies can contract with anyentity as long as that entity hasnot been debarred from federalcontracting and the contract is notfor what is essentially a govern-mental function. However, whenMedicare was enacted, the SocialSecurity Act established somewhatdifferent contracting requirements, which arestill in effect. For example, there is no fairand open competition for selection ofMedicare intermediaries and carriers. ForPart A, the Secretary is directed to enter intocontracts with fiscal intermediaries nominatedby different provider associations. WhenMedicare was enacted, the intent of this pro-vision was to encourage hospitals to partici-pate by giving them a voice in the selectionof claims processors. There are currentlythree intermediary contracts, one of which iswith the National Blue Cross and Blue ShieldAssociation. When one of the local Blueplans declines to renew its contract, thenational association nominates another BlueCross plan. The nomination process hasresulted in a dwindling pool of contractors.Since 1980, the number of contractors has

dropped by half, and contractors seem to beless interested in Medicare business than inthe past. On occasion, the agency has haddifficulty finding qualified contractors.

Other restrictions in Social Security law alsolimit the agency’s ability to manage its con-

tractors effectively. In addition tobeing awarded without full andopen competition, the contractsmust be with health insurers andmust cover the entire range ofclaims processing and relatedactivities (with specific exceptions)and cannot be terminated withoutcause and without giving the con-tractor an opportunity for a publichearing. The contracts must also

be cost-based, not performance-based, andcannot provide incentive bonuses.

Each year since 1993, the agency has askedCongress to enact contracting reform legisla-tion that would allow it considerably moreflexibility in its contracting arrangements.18

Both the GAO and the OIG have consistent-ly testified that such legislation would greatlyenhance CMS’ ability to manage its contrac-tors. However, Congress never seriously con-sidered contracting reform legislation until2001. The Medicare Regulatory Relief andContracting Reform Act of 2001 (H.R.3391) passed the House of Representativeson December 4, 2001 by a vote of 408-0,and was referred to the Senate Committeeon Finance. As passed by the House, the billgives the agency much of the flexibility it has


17 This discussion is derived from the testimony of Leslie Aronovitz, Director of Program Administration andIntegrity Issues, GAO, before the Subcommittee on Health and the Subcommittee on Oversight andInvestigations, Committee on Commerce, June 28, 2001.

18 Previous administrations, beginning with President Reagan, had also requested contractor reform legislation,although not every year.

In part, the difficulties CMS

has in overseeingcontractors stemfrom legal restric-tions in its con-

tracting authority.

sought, including: allowing the Secretary tocontract with any qualified entity, not justhealth insurers; permitting the Secretary toenter into functional contracts for part of theMedicare scope of work; applying the FAR toMedicare contracts; requiring the Secretaryto use competitive procedures in Medicareadministrative contracting; and permittingthe use of performance, quality, price, andother factors, thus allowing contractors tomake a profit.

Passage of contracting reform legislationshould help the agency manage its contrac-tors better, but contractor reform is not apanacea for all the agency’s problems withcontractors. Some of the contractor manage-ment problems probably result from poormanagement practices, but in the panel’sview, insufficient resources for contractoroversight have been a significant contributingfactor. Over the years, the budget for con-tractor management has remained relativelyflat, while the complexity of the programincreased, as did the number of claims.

The contractors themselves have also sufferedfrom resource limitations. When most con-tractors switched to electronic processing ofclaims during the 1990s, their budget waseffectively increased because the costs of pro-cessing claims were lower. However, thesesavings eroded relatively quickly because ofhigher claims volumes and greatly increasedresponsibilities. When Medicare law and poli-cy change, the contractors are responsible forwriting and implementing instructions, andinforming and educating providers about thechanges. The passage of the BBA, BBRA,and BIPA meant both sizable increases in

workload for the contractors, as well as muchhigher levels of confusion among providers,creating a greater demand for customer ser-vice from the contractors. In particular,provider education has suffered because ofresource limitations.

In the panel’s view, both the contractor man-agement function at CMS and the work per-formed by contractors, particularly inprovider education and customer service,have suffered from lack of resources.Increased funding for both contractor over-sight at CMS and administration of the pro-gram by contractors is critical to improvingtheir performance.

OUTDATED INFORMATION SYSTEMS

Medicare administration requires an array ofdetailed information on beneficiary enroll-ment, use of services, provider payments,quality of care, contractor performance, andnumerous other components. To meet theneed for this information, CMS relies onhundreds of data collection and managementinformation systems. Many of these systemswere not designed to communicate with eachother, and most of them are outdated.Further complications stem from the factthat Medicare’s 48 contractors use six differ-ent standard systems to process claims. TheMedicare Part A contractors use two systems,and the Part B contractors use four standardsystems.

As detailed in a recent report by GAO,Medicare’s information system deficits areevident in many respects.19 At present,Medicare relies on multiple information sys-tems that cannot speak to one another, limit-


19 This discussion is largely derived from GAO’s Report, Medicare: Information Systems Modernization NeedsStronger Management, September 2001.

ing the ability to combine data from varioussources to create enhanced information. Theinformation systems do not assemble ormaintain data in an easily accessible format,meaning that some of the information thatexists cannot easily be used in program man-agement. Furthermore, data submissionrequirements are not always well coordinat-ed, limiting the ability to combine data fromdifferent sources to improve analytic capabili-ty. For example, linking skillednursing facility claims with patientassessment data has proven verychallenging, although the assess-ments are used in determiningpayment amounts.

In addition, these systems aremodified frequently to reflectchanges in law, annual paymentupdates, and changes in policies.Since the enactment of the BBA,the number of systems modifica-tions has been much more fre-quent, which has placed considerable stresson already outdated systems.

In early 1994, HCFA undertook a sweepingsystems modernization project, called theMedicare Transaction System (MTS), toreplace the multiple contractor-operatedclaims systems with a single, standard operat-ing system. Originally, HCFA planned toimplement all the elements of the MTSsimultaneously. However, the agency had dif-ficulty defining the systems requirements,and decided to phase-in the MTS over timein order to minimize risk. Still, GAO washighly critical of the agency’s management ofMTS development, faulting the agency fornot developing adequate cost-benefit analy-ses, and underestimating the risks of develop-ing and implementing a comprehensive

solution. Estimates of the project’s costs alsogrew substantially over time. In part, theagency responded to GAO’s criticism of poormanagement by citing lack of resources toproperly develop and manage such a large-scale project. Ultimately, under pressure,HCFA abandoned MTS in August 1997 infavor of a more incremental approach to sys-tems redesign. However, design and imple-mentation of these plans were delayed for

approximately 18 months whilethe agency and its contractors pre-pared all systems for conversion toYear 2000. HCFA, along withmany other agencies, devotedconsiderable effort and resourcesto assuring that its payment sys-tems could process claims afterJanuary 1, 2000. After this con-version was accomplished success-fully, the agency once againturned to system redesign issues.The current plan is much moremodest than MTS. It calls for

reducing the number of standard systemsfrom six to three, and developing a newfinancial management reporting system,called HCFA’s Integrated General LedgerAccounting System (HIGLAS), that will bedesigned to connect with the agency’s otherfinancial and claims processing systems.

At the request of Representative Pete Stark,ranking member of the Subcommittee onHealth of the House Ways and MeansCommittee, GAO reviewed the agency’srevised information system modernizationplans. One of their key findings is thatresource gaps in the agency—both fundingand staff expertise—pose threats to the suc-cess of the agency’s plans. GAO recommend-ed that Congress consider enhancingresources for information system moderniza-


One of [GAO’s]key findings is thatresource gaps in

the agency—both funding andstaff expertise—

pose threats to thesuccess of the

agency’s [informa-tion systems]

plans.


tion contingent upon CMS demonstratingprogress in providing appropriate technicalfoundations and management capacity. GAOalso recommended that Congress providemulti-year funding for the project to provideCMS with the stability and flexibility it needsto maintain and modify some systems whilegradually redesigning or replacing others.

While the study panel did not independentlyevaluate Medicare’s information systems, itbelieves that prompt improvement inMedicare’s information systems is critical,and supports GAO’s recommendations.Improvements in such systems are an essen-tial part of any effort to increase administra-tive efficiency, reduce the need to rely onretrospective fraud enforcement, and mini-mize the regulatory burden of providers.20

FRAUD AND ABUSE

In the mid 1990s, complaints began surfac-ing that HCFA was too aggressive in fightingfraud and abuse and had unfairly accusedproviders of misconduct when they had madeinnocent billing mistakes. The climateregarding fraud and abuse has changed dra-matically since the early 1990s. As describedby former Administrator Nancy-Ann MinDeParle, the government moved from rela-tively lax efforts to a zero tolerance policy onfraud, waste, and abuse in just a few years(DeParle 2000). In retrospect, the changingclimate on fraud and abuse began with a1995 demonstration project by the ClintonAdministration, Operation Restore Trust(ORT), to reduce fraud and abuse in threeareas (nursing homes, home health agencies,

and durable medical equipment) whereMedicare spending was rising rapidly. Thedemonstration had several goals, including:identifying and penalizing those who willfullydefrauded Medicare and Medicaid, identify-ing systematic problems and special vulnera-bilities to fraud and abuse in Medicare andMedicaid, alerting the public and the healthcare sector to fraud schemes, and demon-strating new efforts to provide for voluntarydisclosure of evidence of fraud. By oneaccount, ORT saved $23 for every dollar itspent (Stanton 2001).

The Clinton administration’s desire to pursuefraud and abuse more aggressively was bol-stered by public opinion. In 1996, AARPconducted a consumer telephone study toassess public attitudes toward health carefraud and found that 93 percent of therespondents believed that health care fraudwas either somewhat or extremely widespread(DHHS 2001d). The GAO and the OIGalso pressed for increased attention to fraudand abuse through audits and reports toCongress.

In 1996, Congress enacted HIPAA, funda-mentally altering the landscape in the fightagainst fraud and abuse. It dramaticallyincreased funding and also gave investigativeand law enforcement agencies a much moreprominent role, signaling a shift away fromdealing with fraud and abuse in a low-keyway. Prior to HIPAA, fraud and abuse activi-ties, also known as program safeguard activi-ties, were funded primarily from the HCFAcontractors’ (intermediaries and carriers)budgets, and competed with other contractor

20 In order to examine this issue more carefully, the study panel commissioned a paper written by ThomasStanton, "Fraud and Abuse in the Medicare Program: Evolving Issues and Relationships," that forms much of thebasis of the following discussion.The paper led to the article published in Health Affairs and cited at the end ofthis report.

functions, including paying claims. Overtime, funding for program safeguard activitieseroded. GAO has reported that the numberof Medicare claims grew by 70 percent from1989 to 1996, while funding for programsafeguards grew by only 11 percent (GAO1998). HIPAA changed this by establishing adedicated funding stream for program safe-guard activities, with substantially more fund-ing. In 1995 (prior to HIPAA), an estimated$428 million was spent on program safe-guards. HIPAA appropriated $440 millionfor FY 1997, rising to $720 million in FY2003 and subsequent years. Congress alsocreated a broad-based Medicare IntegrityProgram (MIP) led by the Secretary ofHHS, through the Inspector General and theAttorney General. Funds were specificallydirected to the HHS OIG, the Departmentof Justice, and the FBI, among other agencies.

The infusion of funds had very tangibleeffects on these agencies. The InspectorGeneral used MIP funds to increase thenumber of states with IG offices from twen-ty-one, in 1996, to all fifty, in 2002. OIGstaffing also nearly doubled from about 900in 1997 to almost 1,500 in 2001 (DHHS2001c). Similarly, the DOJ created the posi-tion of Special Counsel for Health CareFraud to coordinate the work of its criminaland civil divisions, the FBI, and the 93United States Attorneys who have indepen-dent authority to bring cases in their ownjurisdictions (Stanton 2001). The FBI alsoadded several health care fraud units and anumber of agents. Predictably, these agenciespursued health care fraud vigorously, and thenumber of enforcement actions increasedsubstantially. In their 2000 annual report on

HIPAA actions, the Attorney General andthe Secretary of HHS reported that federalprosecutors filed 457 criminal indictments inhealth care fraud cases, an increase of 23 per-cent over the previous year. That year, therewere also 1,995 civil matters pending, with233 civil cases filed in 2000 alone. The OIGexcluded 3,350 individuals or health careentities from Medicare, mostly as the resultof criminal convictions. They also reportedthat the federal government won more than$1.2 billion in judgments, settlements, andimposition of civil penalties for health carefraud and abuse.

HIPAA also appropriated more funds toHCFA for fraud and abuse and, for the firsttime, provided HCFA with dedicated fund-ing for fraud and abuse. HIPAA authorizedHCFA to enter into specialized contracts forfraud and abuse detection and prevention.These activities include: review of medicalclaims (both pre and post payment),Medicare secondary payer reviews (whichdetermine whether other payers are liable forservices provided to Medicare beneficiaries),audits of provider cost reports, fraud unitinvestigations, and provider education.21

Nancy-Ann Min DeParle cited fraud andabuse detection and prevention as one of hertop priorities when she became administratorin 1997. Subsequently, the agency reorga-nized to focus more attention on theseissues, and issued its first comprehensive planfor program integrity. From 1996, when theerror rate was about 14 percent of FFS pay-ments, or $23 billion, the agency reducedimproper payments to about $12 billion, or7 percent in 2000 (Morris 2001).


21 All claims are reviewed through an automated process, but fewer than five percent are actually reviewed by aperson.

By most measures, the fight against fraud andabuse would be considered a success.However, many provider groups have beenharsh critics. Their criticism stems largelyfrom three sources: use of the False ClaimsAct (FCA) in health care fraud cases; acharge of inconsistent, confusing, and volu-minous instructions from HCFA and its con-tractors that make it difficult for providers tounderstand what is required of them; andaudit or sampling practices.

The False Claims Act

The DOJ’s use of the FCA in fraud andabuse cases has been particularly contentious,especially for hospitals. Under the FCA,providers are liable for treble damages andpenalties of up to $1,000 for each false claimif convicted. For Medicare, a false claim hasbeen defined as each individual billing for aparticular item or service. From providers’perspectives, DOJ has been overly aggressivein demanding large penalties under the FCAfor largely unintentional billing errors. Someproviders feel that the penalties under theFCA are so large that they are coerced intosettlements. Hospitals were especiallyaggrieved by the 1995 “PATH” audits ofclaims by physicians at teaching hospitals. By1998, DOJ had obtained $67 million in set-tlements from prestigious teaching hospitals.

In response to perceived abuses of the FCA,legislation was introduced in Congress thatwould have limited DOJ’s authority to usethe FCA in health fraud and abuse cases.Although the bill did not pass, it led DeputyAttorney General Eric Holder to issue guid-ance essentially limiting use of the FCA inhealth care matters in June 1998. The guid-ance directs both DOJ and U.S. Attorneys todetermine, before they allege violations ofthe FCA, that the facts and the law sufficient-

ly establish that the provider knowingly sub-mitted false claims. In 1999 and 2000 appro-priations acts, Congress directed the GAO tomonitor and report on whether DOJ proper-ly enforced the guidance (GAO 2001d). InAugust 1999, GAO reported that DOJ’sprocess for reviewing implementation of theguidelines was superficial, and that U.S.Attorneys did not consistently apply theguidance. By August 2001, however, GAOreported that DOJ had taken steps tostrengthen its oversight of compliance, andthat DOJ and the U.S. Attorneys were oper-ating in compliance with the guidance. Still,the FCA remains potent. In 2000, DOJreported that it had recovered over $840million in civil health care fraud, much of itrelated to the FCA.

Inconsistent and Burdensome Guidance

Providers have long complained thatMedicare issues too many rules and instruc-tions, many of which are contradictory orconfusing. They also complain about thepaperwork burden. Some say that they can-not comply with all of Medicare’s require-ments because they don’t fully understandthem. As a result, they feel that they areunfairly accused of fraud or abuse.

The Bush administration has implementedseveral initiatives to improve provider rela-tions. Secretary Thompson has chartered aregulatory reform task force and asked it toidentify regulations that prevent providersfrom serving Medicare beneficiaries effective-ly. The task force will determine what rulesneed to be better explained, streamlined, oreliminated (Scully 2001). CMS Administra-tor Thomas Scully has also taken several steps to improve provider relationships,including: creating open door policy forumsto strengthen communications with pro-


viders; centralizing provider education efforts to improve their consistency; expand-ing the provider education website,www.hcfa.gov/medlearn; providing freecomputer and web-based training courses forproviders; expanding the toll free hotline totwenty-four hours a day, seven days a week;and establishing a quarterly com-pendium of all changes toMedicare so that providers willhave an easier time understandingand complying with Medicarerequirements.

The House of Representatives hasalso passed a bill, the MedicareRegulatory and ContractingReform Act of 2001, which ispending in the Senate. In additionto the contracting reform provi-sions discussed above, the billstreamlines the regulatory process and impos-es new requirements for provider education.In recognition that some of the shortcom-ings in provider education are due to insuffi-cient funding, the bill authorizes anadditional $25 million in FY 2003 and 2004to increase provider education and trainingand improve the accuracy and quality ofprovider responses.

To respond to some of the providers’strongest complaints about the regulatoryprocess, the bill permits the Secretary to issuerules only one business day per month,requires the Secretary to study the collectiveimpact of a new regulation on providers,generally limits the retroactive application ofrules, provides for a 30-day grace periodbefore a rule becomes effective, and absolvesproviders from liability and the duty to makerepayments if they relied on inaccurateinstructions from CMS or contractors.

Claims Reviews and Sampling

Another point of contention betweenproviders and CMS is the use of samplingtechniques to determine whether providershave billed improperly. Currently, contractorsdraw samples of claims and then extrapolateresults to a provider’s entire practice to issue

a demand for repayment. Theagency has long maintained that itdoes not have the ability to surveya provider’s entire practice, andthat extrapolation is an importantand legitimate tool in programintegrity efforts, while providershave viewed it as somewhat extor-tionist.

In general, the regulatory reformbill diminishes the Secretary’s abil-ity to review claims and collect

overpayments by imposing new requirementsin areas where CMS previously had adminis-trative latitude. The bill requires theSecretary to consult with providers to devel-op protocols for random prepayment reviewsof claims, and limits his authority to conductnon-random prepayment reviews unless thereis a likelihood of sustained- or high-level pay-ment error. The Secretary would also be pro-hibited from using extrapolation to collectoverpayments unless there is a sustained- orhigh-level of payment error or the providerdid not correct a payment error after beingnotified of it and being given an opportunityto correct it. In addition, the bill requires theSecretary to establish a process, in consulta-tion with providers, to notify them when aMedicare contractor has identified overuse ofspecific billing codes.

To improve communications, the billrequires central coordination of providereducation efforts through the contractors. It


The study panelviews effective

fraud and abuseprevention, detec-tion, and enforce-ment as essentialto protecting the

integrity ofMedicare.


also requires Medicare contractors to: pro-vide general written responses in a “clear,concise, and accurate” manner within 45business days; provide a toll-free line toanswer questions; keep records identifyingwhich employees responded to which ques-tions; and monitor the accuracy, consistency,and timeliness of information provided. Thebill also establishes a Medicare Provider andBeneficiary Ombudsman.

The study panel views effectivefraud and abuse prevention,detection, and enforcement asessential to protecting the integri-ty of Medicare. Getting the rightbalance between effective fraudand abuse enforcement and main-taining a positive relationship withthe provider community is a deli-cate matter. In the early 1990s,fraud and abuse matters werelargely handled administratively,with relatively little focus onenforcement, or creating a sen-tinel effect. Spurred by public perceptions ofwidespread fraud, and fueled by GAO andOIG reports about lax program integrityefforts, both the executive branch andCongress responded with strong actions.

The enactment of HIPAA was a watershedevent, dramatically increasing the funding forfraud and abuse and shifting the emphasisfrom administrative resolutions to investiga-tive and law enforcement agencies. Congressclearly expected increased recoveries andmore prosecutions from its HIPAA invest-ment, but the response was probably greaterthan intended. By most accounts, the DOJused the FCA with more vigor than the factswarranted, and the provider communityreacted with predictable fear and anger, espe-cially since many also faced increased scrutiny

and demands for repayment from HCFA andthe OIG on other fronts. They felt belea-guered and took their case to Congress,arguing for relief on many fronts. NowCongress is considering regulatory relief leg-islation that would limit some of the toolsthat CMS uses to detect fraud and abuse.

Although there are several other agenciesinvolved in fraud and abuse efforts, the studypanel focused most of its attention on CMS.

In its view, CMS’ focus on fraudand abuse prevention and detec-tion is appropriate. The agency isresponsible for ensuring thatMedicare funds are spent properly,and must be vigilant if it is to ful-fill its responsibilities. Critics ofthe agency have a legitimate point,however, when it comes toinstructions issued by CMS. Theyare frequently voluminous andsometimes contradictory. Thestudy panel supports the agency’srecent actions to streamline the

regulatory process and improve its providereducation efforts. Greater consistency, partic-ularly in instructions and communicationsfrom Medicare’s contractors, is critical inhelping providers comply with the rules.Better responsiveness to provider questionsand concerns is just as important. The agencyand its contractors need more resources toachieve these goals, as Congress has recog-nized in the pending regulatory relief bill.

COMMUNICATIONS WITHBENEFICIARIES

Communicating with beneficiaries has at leasttwo aspects. The first is ensuring that benefi-ciaries are given enough information and theright information to understand Medicareand to make informed choices about their

Getting the rightbalance between

effective fraud andabuse enforce-ment and main-taining a positiverelationship with

the provider community is adelicate matter.

health care. The second is ensuring thatMedicare responds appropriately and quicklywhen beneficiaries have problems.

In the BBA, Congress directed HCFA toestablish a new beneficiary education pro-gram as part of its effort to help beneficiariesunderstand the new plan options in the BBAand promote informed choices. Congressspelled-out the components of the educationprogram in substantial detail. Required ele-ments include providing:

■ notice to beneficiaries at least 15 daysprior to an open enrollment period containing a general description of thebenefits under traditional Medicare,including covered items and services:

❑ information about beneficiary costsharing such as deductibles, coinsur-ance, and co-payment amounts,

❑ information about beneficiary liabilityfor balance billing;

■ notice of procedural rights (includinggrievance and appeals) and the right tobe protected against discriminationbased on health-status-related factors;

■ a description of the benefits, enrollmentrights, and other requirements ofMedigap and Medicare Select policies;

■ information about an M+C plan’s rightto terminate its contract, and the effectsof termination, non-renewal, or reduc-tion in areas served upon beneficiaries;

■ information comparing M+C plans,including:

❑ covered items and services,

❑ cost-sharing,

❑ limitations on out-of-pocket expenses,

❑ differences in cost-sharing, premi-ums, and balance billing for privateFFS plans and MSA plans,

❑ the extent to which enrollees mayobtain benefits through in-networkand out-of-network providers, and

❑ coverage of emergency and urgentlyneeded care;

■ information about the M+C premium;

■ the service area of the M+C plan;

■ to the extent available, quality and per-formance indicators for M+C plans, andhow they compare to indicators for tra-ditional Medicare, including informa-tion on disenrollment rates, enrolleesatisfaction, health outcomes, and therecent record of compliance with theSecretary’s requirements;

■ information about whether the M+Cplan includes mandatory supplementalbenefits in its base benefit package oroffers optional supplemental benefits;and

■ establishment of a toll-free telephoneline and Internet site.

Congress funded about 75 percent of theeducation program from a user fee imposedon M+C plans (GAO 2001b). User fees of$95 million per year were collected from theplans, with the balance from the Medicaregeneral administrative account, and the peerreview organization (PRO) account. HCFAspent an average of $107.8 million a yearfrom FY 1998-2000 on the education program.

From the start, the funding mechanism wasvery controversial. The M+C plans arguedthat they should have to only pay their pro-portionate share of the education program’scost. They also argued that they could do a


better job than HCFA, and that HCFA’spresentation of the material was slantedtoward traditional FFS Medicare. In theBBRA, Congress scaled back the user fees toapproximately $17 million (down from $95million) for 2001. To adjust to the loss ofapproximately $78 million in user fees,HCFA drew on unspent funds from previousyears to fund the program. Beginning in2002, however, the full impact of the reduc-tion will be felt, requiring HCFA to eitherspend an additional $46 million to maintainthe current program, or scale it back.

The National Medicare Education Program

HCFA established the National MedicareEducation Program (NMEP) to implementthe BBA. The NMEP has the following components:

■ 1-800-MEDICARE, a toll-free telephone line;

■ Medicare and You (the Medicare hand-book) and approximately two dozenother education booklets andbrochures;

■ www.Medicare.gov, the Internet site;

■ Health Insurance Counseling programs,funded by $15 million in grants; and

■ Regional Education about Choices inMedicare (REACH) campaign, whichconsists of local health fairs and mediacampaigns.

In the BBRA, Congress directed GAO tostudy the NMEP and periodically report onit. In GAO’s first report, issued in September2001, beneficiaries and beneficiary advocatesgenerally gave the program high marks, butthe M+C plans were more critical.22 Bene-ficiaries and their advocates were pleased with

1-800-MEDICARE. More than 80 percentsaid they were satisfied with it, and call vol-ume has increased dramatically since the linewas introduced, from an average of 27,000calls per month shortly after its introductionto 326,000 calls per month in 2000. Boththe timeliness of answering the calls and theinformation provided appear to be appropri-ate. According to a CMS-sponsored study,92 percent of calls were answered within 30seconds. About 60 percent of callers speakdirectly to a customer service representative,while the remaining 40 percent obtain assis-tance through an automated system. Themost common reasons beneficiaries call is torequest a publication; the most frequentlyrequested are Medicare and You and theGuide to Health Insurance. Beneficiaries alsoask how to apply for Medicare, how to get areplacement Medicare card, or ask questionsabout Medicare, Medicaid, and claims pay-ment. About half of the calls are transferredto a third party to answer. Of those, about18 percent go to a contractor (which proba-bly indicates that these questions pertain toproblems or questions callers have abouttheir own health care), about 9 percent go toa State Medicaid agency, about 9 percent tothe Social Security Administration, about 4percent to State Health Insurance Programs(SHIPS), and the remainder to other entities,such as M+C plans.

Reaction to Medicare and You has been moremixed. Focus groups sponsored by HCFAreported that the handbook is comprehen-sive, understandable, and a good reference.However, most beneficiaries use the hand-book as a quick reference, rather than read-ing it all the way through. M+C planrepresentatives reported that it was too long


22 The following discussion is largely derived from that GAO report.


and over-emphasized traditional FFSMedicare at the expense of the plans. HCFAhas had difficulty meeting some of the BBArequirements to provide comparative infor-mation about M+C plans in the handbook.In the last few years, a number of plans havedropped out of Medicare or reduced theirservice areas after Medicare and You hadalready gone to print. In view of the leadtime required to get 40 million copies ofMedicare and You printed and mailed to ben-eficiaries in time for the open enrollment sea-son, HCFA decided to provide less detailedinformation about M+C plans inthe handbook. More recently,CMS postponed the date forM+C plans to report their premi-um and benefits information fromJuly 1 to September 15, 2001,making it impossible to includethis information in the handbook.

Reaction to the Internet site hasalso been relatively positive; about85 percent of users found it helpful. Mostbeneficiary advocates said that they think thatthe site is used more by family members thanbeneficiaries. Since its inception, HCFA hasadded comparative information about M+Cplans, nursing homes, and Medigap insur-ance. M+C plan representatives reported thatthe standardized descriptions of M+C planscould confuse beneficiaries.

Most beneficiary advocates said that theREACH campaign was an essential part ofthe NMEP, and were generally positive aboutit, particularly the work of the SHIPs, whichprovide beneficiaries with individual assis-tance. While health plan representatives weresupportive of local outreach efforts, theycomplained that they were not included inthem often enough.

Overall, GAO reported, the NMEP hasincreased the amount and type of informa-tion regarding Medicare and M+C plans.However, it was unable to evaluate whetherthe NMEP persuaded beneficiaries to activelyconsider their health plan choices. In the fallof 2001, the Bush Administration strength-ened the NMEP by expanding 1-800-MEDICARE to twenty-four hours a day,seven days a week and conducting a $30 mil-lion media campaign to provide beneficiarieswith more information about their choices.

After reviewing the evidenceabout the NMEP, the study paneldid not concur with the assess-ment that Medicare has done apoor job communicating withbeneficiaries, or that HCFA hasnot tried to foster more choice.Some of the criticism of theNMEP was probably related tothe user fees, and M+C organiza-tions had a legitimate complaint

that they were bearing more than their fairshare of the costs. Prior to the BBA,Medicare was already a very complex pro-gram. The new types of plans created in theBBA and the confusion resulting from M+Cplans that have withdrawn from Medicare inthe last few years have made Medicare evenmore complex, challenging the ability ofmost beneficiaries to understand everythingthey need to know. While more educationefforts would be beneficial, the panel com-mends the agency for the progress it hasmade since the BBA. Beneficiaries clearlyhave far more access to information than theydid several years ago. GAO also recommend-ed that CMS be given more latitude in con-ducting the NMEP, especially in regard tothe content, format, medium, and timing ofthe information that the agency distributes to

Reaction to theInternet site has

also been relative-ly positive; about

85 percent ofusers found it

helpful.

beneficiaries. The study panel concurs withGAO’s recommendation, so that the agencycan have the flexibility it needs to respond tochanging circumstances and implement rec-ommendations to improve the educationprogram.

The study panel thinks that a strong publicinformation campaign is essential to helpbeneficiaries understand their choices, answerquestions, and resolve problems. While theNMEP and the expansion of 1-800-MEDICARE are positive steps, there are stilllongstanding issues about whetherbeneficiaries get sufficient andtimely help in resolving problems.Providing assistance to beneficia-ries has been a responsibility ofthe contractors and of the SHIPs,with CMS itself providing relative-ly little direct assistance. However,providing assistance to beneficia-ries (and to providers) has proba-bly not received either theattention or the funding needed to providecustomer services comparable to those in theprivate sector, particularly in the last severalyears, when contractor budgets have becomeincreasingly tight.

The study panel thinks that providing morepersonalized assistance to beneficiaries isimportant. This assistance could take placevia the internet, the telephone, or by estab-lishing a local presence in Social Securityoffices.

LACK OF CONTINUITY INLEADERSHIP AND STAFFING ISSUES

Over time, several issues have been raisedabout whether CMS is appropriately staffed.Observers have said that the agency suffersfrom a lack of continuity in leadership, too

few senior staff to manage the agency’s com-plex responsibilities, an impending “braindrain” as senior managers approach retire-ment, and an overly insulated staff that doesnot have the appropriate skill set or trainingto manage such a complex program.

Tenure of the Administrator

The Administrator is a presidential appointee,confirmed by the Senate, who reports to theSecretary of HHS. Thus, an administratormay only serve as long as the president who

appointed that administrator is inoffice. The salary of the adminis-trator is set by law by Section5315, Title 5 of the Executive PaySchedule. For 2002, the adminis-trator’s salary is $130,000. Theadministrator does not have thehighest salary in the agency. In2002, 35 employees are beingpaid more than the administrator;some because they are receivingsalary adjustments and some

because they are at the top of the SeniorExecutive Service (SES) pay scale, $138,200.

Since the creation of HCFA in 1977, theagency has had 22 administrators or actingadministrators (GAO 2001e). For about 15percent of the time, acting administratorshave led the agency, sometimes for lengthyperiods. The average tenure of administratorsconfirmed by the Senate is 2.5 years. Giventhe degree of turnover at the top of theagency, and the leadership void caused byacting administrators, GAO and others havequestioned whether the lack of continuity hasdeleterious effects on the agency’s work.Some have questioned also whether thedemands on the administrator are too great,and whether narrowing the agency’s mission


Like GAO, thestudy panelbelieves that

increasing thetenure of theAdministrator

would be advantageous.

might help both the administrator and theagency become more successful.

Like GAO, the study panel believes thatincreasing the tenure of the Administratorwould be advantageous. One possible alter-native is appointing the administrator to afixed term, rather than serving at the pleasureof the president. The director of the FBI andthe Surgeon General both have fixed termsthat do not coincide with the length of thepresident’s term. In the case of the FBI, thathas given the director consider-able autonomy, credibility, andlatitude to enforce the law with-out political interference. WhilePresidents and the AttorneysGeneral have sometimes wishedfor more control over the FBIdirector, the director’s autonomyhas generally been viewed posi-tively. FBI directors also have gen-erally served fairly long terms. In the case ofthe Surgeon General, the evidence is some-what mixed about whether a fixed term con-tributes to longevity and autonomy. Forexample, the first Surgeon General in theClinton Administration, Joycelyn Elders, waspressured into resigning when she voiced anopinion not consonant with theAdministration’s views. Other SurgeonsGeneral have served the full length of theirterm, but their visibility and influence greatlydeclined when a new administration tookoffice. While the study panel recognizes thatthe evidence about whether a fixed termincreases longevity is inconclusive, it believesthat proposals that might lead to increasedlongevity warrant consideration.

Increasing the administrator’s salary mightalso improve retention. The study panelbelieves that the administrator’s salary ought

to reflect the stature and responsibilities ofthe job, and suggests that it be commensu-rate with that of the Commissioner of SocialSecurity, whose salary is $166,700.

Insufficient Number of Senior Managers and Impending Retirements

GAO has testified that the agency has fewersenior executives (members of SES) thanother agencies with significantly smaller bud-gets and responsibilities. Currently, CMS has54 SES positions, of which 10 are non-career

(or political) appointments. Thestudy panel believes that increas-ing the number of senior execu-tives would help the agency betterfulfill its responsibilities.

A significant percentage of thecurrent SES corps is approachingretirement eligibility. In 2002,eight members will be eligible,

increasing to 23 by 2006. Unless the agencyretains some of those eligible for retirement,and recruits and trains new leaders in thenext few years, it will lose about 50 percentof its most experienced managers. In addi-tion, the agency has recently lost some of itsmost senior managers to other governmentagencies or the private sector, in part becausethe demands upon them were too great andthe resources too few.

Inappropriate Skills and Training

GAO and OIG have reported that theagency lacks staff with the right skills to fulfillsome of its more complex responsibilities. Inparticular, they said, the agency did not havestaff with expertise in implementing the newplan options in the BBA – PPOs, PSOs, andMSAs (GAO 2001f). In a review of theagency’s regional offices, OIG reported thathalf of the regions’ managed care staff did


…increasing thenumber of seniorexecutives wouldhelp the agencybetter fulfill itsresponsibilities.


not have the clinical knowledge and back-ground to assess quality of care, and that fewmanaged care staff had data analysis skillscritical to assessing plan performance(DHHS 1998). CMS has also had problemsrecruiting and retaining qualified informationsystems staff.

The agency is cognizant of these issues, andis conducting a four-phase workforce plan-ning process to identify skills and competen-cies that it needs in order to carry out theagency’s mission. In recent years, CMS hasalso provided more opportunities for trainingthrough the Federal Executive Institute(FEI) sponsored by the OPM. The FEI pro-vides a highly regarded, month-long manage-ment training program in Charlottesville,Virginia, for members of the SES and SEScandidates. CMS managers also participate inyear-long training programs with the Councilon Excellence in Government, and in semi-nars with the National Health Care Purchas-ing Institute, sponsored by the Robert WoodJohnson Foundation.

On hiring, the agency must comply with civilservice personnel requirements in Title 5 ofthe U.S. Code. Under those provisions, fed-eral agencies must post jobs for a specifiedlength of time, establish a panel to review allapplications to determine the three best qual-ified applicants, give preference to veterans,select from among the three best qualifiedapplicants, and hire citizens. Complying withthese requirements is time-consuming; CMSestimates that it takes an average of threemonths from the time a position is posteduntil a job offer is made.

Federal agencies also must pay according tothe civil service pay scales. For 2002, the topfederal salary (excluding the SES pay scale) is$119,682. The civil service requirements can

limit agencies’ abilities to hire qualified appli-cants. Sometimes, qualified applicants takeother positions because the hiring processtakes too long. The federal pay scale is alsonot competitive with the private sector forsome types of positions, such as actuaries,information systems professionals, clinicians,and others. Even for the SES, where the topsalary is $138,200 in 2002, agencies fre-quently have difficulty recruiting executiveswith appropriate technical and managementexpertise.

CMS currently has flexibility to pay morethan the civil service pay scale in some situa-tions, but does not have authority to circum-vent the hiring rules. For example, under thePhysician Comparability Allowance (PCA),which is available to any federal agency,physicians in medical officer positions can bepaid between $10,000 and $30,000 morethan others in the same pay grade. Of the 32physicians currently employed at CMS, 24receive a PCA allowance, and three receive asimilar exception called physician special pay(PSP), leaving only five who do not receiveany salary differential. The agency also usesrelocation allowances when appropriate andretention bonuses, which allow up to a 25percent increase in salary for one year, toretain valued employees who have receivedprivate sector job offers. Currently, nineemployees are receiving a retention bonus.

CMS does not have the same flexibility assome other federal agencies to exceed thesalary cap or hire outside the civil serviceprocess. For example, Public Health Service(PHS) agencies were granted authority in lawto hire “special experts,” who are not subjectto the civil service pay scale. Agencies hiringspecial experts also are not required to honorthe veterans’ preference. The special expert


designation was designed with researchers inmind, and special experts are not permittedin supervisory positions. Special experts areappointed for a two-year period, with annualrenewals thereafter. They are considered fed-eral employees for purposes of benefits, butdo not have civil service employment protections.

The National Institutes of Health(NIH) and other PHS agencieshave additional hiring flexibilitythat CMS does not. In the SeniorBiomedical Research Service(SBRS), designed for biomedicalresearchers at NIH, non-managersmay be paid at the SES level,which is otherwise restricted tomanagement jobs.

While some HHS agencies havemore flexibility regarding the Title5 requirements, all HHS agenciesare still generally subject to Title 5requirements. However, Congresshas enacted legislation thatexempts three federal agenciesfrom Title 5 requirements toallow them to meet specificneeds.23 In 1996, Congressenacted a law that allowed the FederalAviation Administration (FAA) to establishits own personnel system to address theunique demands of its workforce. Amongother things, the FAA’s system streamlinedhiring through authority for “on the spot”hiring for special needs and hard to fill posi-tions, provided for recruitment bonuses,reduced the number of steps needed to makea hiring decision, and reduced other rules to

allow for faster hiring. FAA human resourcemanagers have expressed “strong conviction”that the new system has allowed them todevelop innovative executive and professionalrecruiting processes and use recruiting firmsmore effectively to bring in the right talent.As evidence of success, FAA pointed to thefact that 17 percent of newly hired executiveshave come from outside the agency, and that

more than 90 percent of seniorexecutive positions in research anddevelopment have come from out-side the agency.

Congress took a more limitedapproach for the U.S. Patent andTrademark Office (USPTO). Itestablished the USPTO as a “per-formance-based” organization(PBO), which typically means thatthe agency head and senior man-agers work under contract, withperformance goals. Becauseunions representing USTPO per-sonnel objected to proposals toexempt the agency from Title 5requirements, Congress did notdo so. However, Congress didmake one change that USTPOofficials viewed as crucial. It gave

the USTPO independence from its parentagency, the Department of Commerce, inpersonnel matters. Previously, USTPO had tocompete with other agencies in theCommerce Department for SES positions.Under the new system, USTPO can workdirectly with OPM to get new SES positionsand thinks this flexibility gives them a betteropportunity to get the executive resourcesthey need.

23 The discussion of these three agencies is based on “A Weapon in the War for Talent: Using Special Authoritiesto Recruit Crucial Personnel,” Hal Rainey, School of Public and International Affairs, University of Georgia, PriceWaterhouseCoopers Endowment for the Business of Government, December, 2001.

CMS’ work ishampered by its

inability to recruitand retain staff

with the expertiseand experienceneeded to run

such a complicat-ed program, and

that some targetedrelief from boththe salary limita-

tions and civil ser-vice personnelrules would be

beneficial.


Congress also made the Office of StudentFinancial Assistance Programs (OSFAP) inthe Department of Education a PBO. In thisinstance, Congress gave OSFAP several formsof personnel flexibility including exemptionfrom limits on the numbers and grades ofemployees and authority to hire up to 25technical and professional employees whowould not be subject to Title 5 restrictions.OSFAP has not established a systematic wayof paying these 25 employees. Instead, theyhave based salary on what the person wasmaking in his or her previous position, whatthe person’s supervisor thought justified andnecessary, and the apparent value of the per-son’s skills, credentials, and services. OSFAPhas reported that these flexibilities have

enabled the agency to get the people it wantsmuch faster than before. They said that theseauthorities have particularly helped themattract excellent employees in informationtechnology, financial management, and otherareas.

The study panel believes that CMS’ work ishampered by its inability to recruit and retainstaff with the expertise and experience need-ed to run such a complicated program, andthat some targeted relief from both the salarylimitations and civil service personnel ruleswould be beneficial. As with other agenciesthat have been granted such exceptions,employees hired under these exceptionswould be civil servants.

In addition to looking closely at CMS’ cur-rent governance and management to evaluatestrengths and weaknesses, the study panelevaluated other potential governance struc-tures to determine whether they might bemore suitable for Medicare. During thisprocess, the study panel heard from policy-makers, administrators, and others with first-hand experience in Medicare governance.

The Office of Personnel Management’sadministration of FEHBP is sometimes putforward as an example of successful govern-ment management of a program comparableto Medicare+Choice (see for example, Butlerand Moffit 1995). Among the key differ-ences between the programs is a much lessdetailed and specific legislative mandate foradministering FEHBP, compared withMedicare, which allows OPM greater admin-istrative flexibility and discretion in makingprogram management decisions. Also impor-tant is that the FEHBP entails a much lesscomplex set of administrative requirements(for example, FEHBP does not risk-adjustpayments to plans). The size of FEHBPadministration is minuscule compared withMedicare staff and resources. Medicare’sadministration of health plans could be sim-plified in many respects, allowing it a numberof administrative efficiencies enjoyed byOPM. However, Medicare’s status as an entitlement program adds administrativecomplexities that OPM does not face in managing an employee benefits program. In addition, complications presented by theneed to serve an elderly and disabled popula-tion will always present challenges in Medi-care that the FEHBP does not face. For

example, a higher proportion of theMedicare population has cognitive impair-ments. This presents challenges for the pro-gram in communicating with beneficiariesand ensuring that the health system is com-prehensible and negotiable.

The panel reviewed a variety of alternatives tothe current Medicare governance structure.Four alternative models were examined: cre-ating an independent agency that is not partof any cabinet department, changing thegovernance structure to an independentadministrative board, converting CMS to aperformance-based organization, and switch-ing to a wholly owned government corpora-tion model of administration.

THE INDEPENDENT AGENCY MODEL

Making CMS independent of HHS couldreduce some layers of bureaucracy thatimpede administrative flexibility and efficien-cy, and reduce accountability. As part ofHHS, CMS’ proposals must be reviewed andapproved by other agencies in the depart-ment and the Secretary before CMS can act.Although many have argued that extensivereview improves the final product, it alsoslows down the agency’s work. CMS alsomust compete for the Secretary’s attentionwith other large agencies such as the NIH,CDC, and the FDA. Particularly sinceSeptember 11, 2001, the Secretary hasdevoted a considerable amount of attentionto bio-terrorism issues.

Large, complex administrative agencies canfunction well and with considerable autono-my within departments, but also can be


Chapter 4:Consideration of Other Governance Structures

effectively managed without being part of adepartment (NAPA 1984). The choice ofwhether to place an agency within a cabinetdepartment or to make it independent relatesto the tension in government between thePresident as a centralizing focus and the myr-iad of constituencies that represents particularinterests. As a general rule, it is preferable tolink a government agency to a cabinetdepartment. Without a member of the cabi-net to defend it, an independent agencytends to be at the mercy of narrow intereststhat may influence relevant Congressionalcommittees. By contrast, a cabinet secretaryis better positioned to defend his or herdepartment against encroachment.

In considering the desirability of makingCMS independent of HHS, policymakersmust consider several factors. One is theimportance of the roles played by HHS inMedicare administration and whether CMScould be expected to fill those roles as well ifmade independent. Another is the potentialbenefit of making the CMS administratordirectly and fully accountable to thePresident for the performance of the agency.This must be counterbalanced, however,against the value of the political buffer fromthe influence of constituencies and the addi-tional layer of oversight and input into deci-sions and actions that the Secretary furnishes.

The panel considered the example of theSocial Security Administration (SSA). In1935, when the Social Security program wascreated, it was run by an independent agency,but President Franklin Roosevelt brought itinto a larger agency as part of a reorganiza-tion of the executive branch shortly beforethe U.S. entered World War II. Debatesabout whether SSA should be an indepen-dent agency began anew in 1981, when the

National Commission on Social Securitystrongly recommended that SSA becomeindependent again. Congress debated theissue for almost 15 years, until it passed legis-lation in 1994 that made SSA an indepen-dent agency. When the bill was enacted,members of Congress maintained that itwould increase SSA’s stature, promote long-term stability of the Social Security program,increase the public’s confidence in the pro-gram, and protect SSA from the cross-fire ofpartisan politics (Conference Report on H.R.4277 1994) (Social Security AdministrationReform Act 1999).

The SSA example is instructive because SSAand CMS have some similarities. Bothadminister programs that help vulnerablepeople meet critical needs, and both disbursefunds. Key differences are in agency size(approximately 65,000 SSA employees,which makes it comparable to the entire staffof HHS, compared with only about 4,500employees at CMS and 22,500 contractorstaff) and in program complexity. SSA’s basicfunction is to determine eligibility and pro-vide monthly benefits, but CMS’ work is infi-nitely more complex, and involves a muchbroader array of stakeholders. SSA also has adirect relationship with its beneficiariesbecause it makes payments to them everymonth. In contrast, CMS makes payments toproviders on behalf of beneficiaries, whichmay weaken beneficiaries’ identification ofCMS as the source of Medicare benefits.Another key difference is that CMS directlyaffects a significant sector of the economy,while SSA does not.

There have been no formal studies of SSA’sindependence, although most observers seemto think it has generally had a positive effect.However, the SSA’s effectiveness was proba-

62 N a t i o n a l A c a d e m y o f S o c i a l I n s u r a n c e62 N a t i o n a l A c a d e m y o f S o c i a l I n s u r a n c e

bly compromised to a certain degree initiallybecause its first Commissioner failed to winSenate confirmation.

One former Administrator, Bruce Vladeck,and a colleague, Barbara Cooper, surveyedmore than 25 experts on Medicare, includingrepresentatives of providers and beneficiaries,Congres-sional staff, and current and formerCMS executives to determine what could bedone to make Medicare better (Vladeck2001). They recommended that CMS bemade an independent agency, similar to SSA,to increase its responsiveness and flexibility.

THE INDEPENDENT BOARD MODEL

Establishing an independent board to man-age the participation of private health plansin Medicare is an important component ofsome Medicare reform plans. These proposalsstem from two sources: a desire to removeCongress from the details of Medicare bygiving the board authority to deal with mat-ters that currently come to Congress; and abelief that an inherent conflict exists betweenadministering a government-run fee-for-service system and a system of private man-aged care plans in the same agency.

Under one proposal, Congress would estab-lish a board appointed by the President, butoperating independently of the executivebranch and, thus, not accountable to thePresident. The board would report directlyto Congress, set program policy, and managea staff responsible for administering a systemof competing plans. CMS would continue toadminister one of the plans, i.e. the existingFFS program, but would report to theboard. In a variant of that proposal, the

board would be responsible for only somefunctions, including beneficiary educationand the M+C program, while CMS wouldcontinue to administer FFS Medicare, andwould report to the Secretary.

One advantage of a Medicare board wouldbe greater administrative flexibility in manag-ing the M+C program. The board wouldhave greater independence from the execu-tive branch. The Federal Reserve Board, forexample, is capable of choosing whether tocoordinate its economic policies with thoseof the Treasury Department; because of itsindependence from the executive branch, it isfree to do otherwise (Merlis 2000). Potentialdisadvantages of a board include: a lack ofcoordination between the FFS and M+Cprograms, absence of accountability to theexecutive branch or Congress, and a weaken-ing of leadership. Questions have also beenraised, but not resolved, about whether thistype of board violates the separation of pow-ers clause in the Constitution. The DOJargued that at least two aspects of the boardmodel could be unconstitutional, while theAmerican Law Division of the CRS arguedthat Congress has broad and far-reachingauthority over how executive branch agenciesare structured (Raben 2000).24

Some critics of the Medicare board modelmaintain that creating an independentMedicare board could result in inconsistenttreatment of Medicare beneficiaries (depend-ing on which entity was responsible for theircare), confusion among beneficiaries andproviders, conflicting regulations, and poten-tially duplicative staff functions (CRS 2001).For example, beneficiaries switching back andforth between traditional FFS Medicare and


24 Other proposals, including one passed by the House of Representative in the 106th Congress, and now beingconsidered again, would obviate this problem by placing the board under the direct authority of the Secretary.


M+C would be served by different agencies.This would create an extra burden for benefi-ciaries dropped by their M+C plan and wholive in an area not served by another M+Cplan. Since 1999, 327,000 beneficiaries havefound themselves in this situation (CRS2001).

Some have questioned whether an indepen-dent Medicare board would be sufficientlyaccountable. Under some proposals, theMedicare board is not designed to beaccountable to the President or the executivebranch. In testimony before the SenateFinance Committee, HCFA AdministratorNancy-Ann Min DeParle pointed out thatthe President would have virtually no author-ity over one of the most important federalprograms (DeParle 2000). Questions havealso been raised about whether the boardwould be accountable to Congress.

The third issue relates to the relative value ofmoving from a single administrator to a multi-member board. With some exceptions, such asSSA and the Small Business Administration,Congress tends to place a board structure atthe top of independent agencies. From apublic administration perspective, the valueof a board depends largely on whether theindependent agency has operational or regu-latory responsibilities.

In most cases, the creation of a boarddetracts from, rather than enhances, thecapacity and accountability of a governmentagency with operational responsibilities, likeCMS. Examples of independent agencieswith operating responsibilities that are gov-erned by boards of directors include theExport-Import Bank of the United States,the Tennessee Valley Authority, the PensionBenefit Guaranty Corporation, and theFederal Retirement Thrift Investment Board.

The diversity of viewpoints on a board andthe lack of a single locus for accountabilitytend to impede the organization’s ability toundertake effective administration.

Multimember boards are often found in reg-ulatory agencies with quasi-legislative orquasi-judicial responsibilities. In regulatoryagencies, and in contrast to operating agen-cies, divergent opinions among board mem-bers are considered helpful for assuring thefairness of a decision. Multimember boardsalso are helpful in insulating some agenciesfrom potential political interference in theiroperations, as is the case with the Board ofGovernors of the United States PostalService (USPS) and the Federal RetirementThrift Investment Board. In both cases, theboard is charged with appointing the chiefexecutive of the agency. The insertion of amultimember board between the chief execu-tive and the political process is consideredvaluable in protecting the agency’s operationsfrom the kind of untoward political interven-tion that characterized USPS before its reor-ganization in 1971. Finally, the Congressmay place an independent board at the topof an agency as a way to promote responsive-ness to stakeholders. This happened recentlywith the Internal Revenue Service (IRS) afterallegations of unduly harsh IRS collectionpractices.

THE PERFORMANCE-BASEDORGANIZATION MODEL

Increasing accountability for performance has been a goal in government programadministration in recent years. In 1993, the Congress enacted the GovernmentPerformance and Results Act, which requiresgovernment agencies, including CMS, todevelop performance goals and strategicplans for meeting them. Under the law,

agencies must define performance measuresto assess their progress in meeting selectedgoals. Some indications suggest thatMedicare’s administrative agency lags behindothers in adopting a performance-based ori-entation. For example, GAO recently report-ed findings from a survey of federal managersshowing that CMS’ managers were amongthe least likely to say they were held account-able for results to at least a great extent(GAO 2001e).

The performance-based organization modeltakes the movement one step further bygranting an agency a significant degree ofadministrative flexibility in meeting estab-lished goals. In the 1990s, the VicePresident’s National Performance Reviewproposed creation of a new organizationalform, known as the Performance BasedOrganization (PBO). In its pure form, thePBO involves the design of an organization,often located within a larger department, toinclude a Chief Operating Officer who servesa five-year term. The Chief Operating Officernegotiates a performance contract with his orher superior and is compensated in propor-tion to the achievement of the annual goalsin that contract. In addition, the PBO itself issubject to performance goals. In practicaleffect, the consideration of PBO status hasprovided agencies with an opportunity toseek needed management flexibilities, espe-cially in personnel actions and contracting, inreturn for a commitment to achieving perfor-mance goals.

Only two PBOs have been created to date:OSFAP in the Department of Education, andUSPTO in the Department of Commerce.The study panel considered the experience ofthe OSFAP as an example of how PBO statuscan affect an administrative entity’s perfor-

mance, although the OSFAP does not sharewith CMS a comparable mission in terms ofcomplexity or scope. In general, the panelfound that the administrative flexibilitiesgranted to OSFAP have been instrumental inallowing the office to achieve its administra-tive goals. However, the office’s status as aPBO may also have created administrativefriction within the department that has unde-sirable costs.

THE GOVERNMENT CORPORATION MODEL

Another model for Medicare administrationand governance that was examined by thepanel is the government corporation model.The U.S. Postal Service (USPS) provides anexample of this type of structure. Like many,but not all government corporations, it ischaracterized by considerable potential free-dom in personnel management, contracting,and purchasing.

The government corporation is an organiza-tional form that can be quite helpful in sup-porting the operations of an agency thatfunds itself by providing business-type ser-vices. The corporate form of organization isparticularly suited to the administration ofgovernment programs which are predomi-nately of a commercial character—thosewhich are revenue producing, are at leastpotentially self-sustaining, and involve a largenumber of business-type transactions withthe public. In their business operations, suchprograms require greater flexibility than thecustomary annual appropriations budgetordinarily permits.

In contrast to PBOs and most other forms ofgovernment organization, the governmentcorporation gains the authority to keep itsaccounts and manage its affairs on a multi-


year basis. This can provide considerable flex-ibility in managing the organization’s affairsand permits a business-like approach to mak-ing investments. In other words, a govern-ment corporation that is financiallyself-sustaining does not need annual appro-priations; it funds itself, instead, from rev-enues that it generates. For example, theUSPS sells mail delivery services, theTennessee Valley Authority sells power, andthe Government National MortgageAssociation (Ginnie Mae) charges a fee forguaranteeing mortgage-backed securities.

EVALUATION OF ALTERNATIVEGOVERNANCE MODELS

In considering whether a different gover-nance structure might help Medicare runmore efficiently, the study panel consideredthe words of Hippocrates, “First, do noharm.” In order to recommend a differentgovernance structure, the panel would haveto judge it clearly superior to the currentstructure for the long term. In addition, thebenefits of adopting an alternative structurewould have to outweigh the costs (both fiscaland psychic) of implementing it. Adopting adifferent governance structure would requireconsensus, entail considerable use ofresources, and slow down, at least for a time,the work of the agency. Research also showsthat externally imposed reorganizations areless likely to succeed than internally drivenreorganizations because they are less likely totake organizational culture into account, lesslikely to be rooted in sound policy theory,and more likely to trigger bureaucratic resis-tance (Gormley 2000).

The study panel also thought it important toconsider whether a different governancestructure would help lessen Congress’smicromanagement of CMS, and the effect of

new structure on the now suboptimal coordi-nation between Medicare and Medicaid. Inthe study panel’s view, a governance modelthat would weaken coordination between thetwo programs would be detrimental. In thecase of the independent agency model, coor-dination would be weakened if Medicaidremained a part of HHS, but could be main-tained if Medicaid were part of the newagency. The board model, especially a boardindependent of the executive branch, wouldlikely increase the coordination problemsbetween the two programs.

Based on these considerations, the studypanel did not reach consensus that the cur-rent governance structure is fatally flawed orthat one of the alternative models should beadopted in its purest form. The panel mem-bers held widely divergent views aboutwhether other governance structures wouldbe preferable. Some panel members thoughtthat one or more of the governance modelscould be customized to fit the particular cir-cumstances of CMS. A number of membersfound promise in the model of SocialSecurity as an independent agency and sug-gested that the Social Security Administra-tion’s experience in moving to independentagency status and its track record since inde-pendence be studied further to see if CMScould benefit by becoming an independentagency. However, other members cautionedagainst the independent agency approachbecause CMS would lose the advocacy andprotection of the Secretary. In their view, thecurrent governance structure is appropriate,although some structural separation of FFSand M+C within CMS would help allay con-cerns about inherent conflicts of interestbetween the two. The panel also discussedthe merits of streamlining the HHS depart-mental review process, so that CMS can



operate more efficiently. Such an approachmight relieve some of the most critical problems CMS has as an operating agency of HHS without the disadvantages of independence.

Some panel members viewed the boardmodel, which would report directly toCongress and, thus, not be accountable tothe President, as a desirable model for gov-erning Medicare+Choice. They said it couldimprove administrative capacity and offerincreased flexibility, if the board were struc-tured to be independent of any executiveagency. Some panel members also urged con-sideration of a board that would be locatedwithin HHS and thus accountable to theSecretary and the President. Other panelmembers, who opposed the board, expressedconcerns about Congress’ ability to hold theboard accountable for sound decision-makingand the constitutionality of an independentboard. Further, they said that a program aslarge and vital as Medicare ought to beaccountable to the President.

Some panel members expressed the view thatthe fundamental problem stems more fromthe detailed nature of the statute than thegovernance structure. One possible remedy

for that would be changing Medicare to bemore like FEHPB so that Congress wouldnot have to be nearly as involved as they arenow.

Two of the models were judged not suitablefor CMS. The study panel concluded that thePBO model was probably not appropriate forCMS as a whole, although the concept mightbe useful in managing contractors. While itsadministrative flexibilities would be advanta-geous to CMS, they also have the potentialto make the relationship between HHS andCMS counter-productive. In their view, manyof the advantages of being a PBO could beconferred on CMS through specific changesin legislation, without actually changing itsgovernance structure. The precedents forPBOs also seem to be for organizations witha narrower mission and not nearly the samescope in policy-making.

The study panel also viewed the governmentcorporation model as not well suited toMedicare program administration. Successfulexamples of this model normally have adefined way of generating revenue to becomefinancially self-sustaining. Since CMS offersfew business-type services to the public, thismodel does not seem to be applicable.

The study panel used its framework (capacity,accountability, and credibility) to evaluatehow well the governance and administrationof Medicare is serving beneficiaries and tax-payers. In the study panel’s view, many of theagency’s problems are reaching a criticallevel. In an open letter to Congress and theExecutive more than three years ago, threeformer administrators, health policy experts,and advocates warned of an impending man-agement crisis that threatened to cripple theagency (Butler 1999). Lack of resources,both human and financial, and insufficientadministrative flexibility are the primaryproblems. GAO said, “Relative to the size ofprivate health insurers and their administra-tive budgets, HCFA runs Medicare on ashoestring. As we and others have reported,too great a mismatch between the agency’sadministrative capacity and its designatedmandate could leave HCFA unprepared tohandle Medicare’s future population growthand medical technology advances” (Scanlon2000).

Recommendation 1

Medicare policy makers should act now toaddress administrative and managementissues in CMS, regardless of whetherCongress takes action on broaderMedicare reform.

Despite an apparent consensus and a growingsense of urgency that CMS cannot fulfill allof its responsibilities, neither the administra-tion (under both Presidents Clinton andBush) nor Congress has proposed actions tostrengthen the agency. To be fair, severalmembers of Congress have offered Medicare

reform proposals that would restructureCMS, and most discussion has been focusedon Medicare reform, with administrative andmanagement issues subsumed in that debate.But Congress appears further from enactingMedicare reform now than it was three yearsago, while pressure on CMS continues togrow. The study panel believes these prob-lems are threatening to imperil the work ofthe agency, especially if no relief is in sight.Therefore, the study panel recommends thatMedicare policymakers act now to alleviatethe administrative and management issuesthat keep CMS from functioning more effectively.

Recommendation 2

A panel of independent experts should beappointed to prepare an analysis of theimpact on Social Security and its stake-holders of the transition from an operat-ing agency of HHS to an independentagency, as well as its ongoing perfor-mance. The report should include ananalysis of the implications of such achange for CMS.

In its evaluation of alternative governancemodels, the study panel did not find one soclearly superior that it would recommend itsadoption. However, the panel was intriguedby the independent agency model, and thinksthat it could have considerable promise forCMS. While the SSA’s move to independentagency status seems to be regarded favorably,no formal evaluation has been conducted, orcommissioned. In addition to shedding lighton the performance of the new agency, sucha study would be helpful to policy-makers in


Chapter 5:Conclusions and Recommendations


understanding what the change entailed, andwhether any problems arose during imple-mentation. The study panels recommendsthat such an evaluation be undertaken todetermine whether moving to independentagency status would help CMS better accom-plish its work.

CAPACITY ISSUES

Recommendation 3

In order to enable CMS to fulfill itsresponsibilities, Congress should increaseadministrative funding for the agency.

In the study panel’s view, many of theagency’s shortcomings can be attributed to alack of resources to fulfill all of the responsi-bilities it has been given. Medicare is a verycomplex program to administer, and hasbecome more difficult with the passage ofseveral major pieces of Medicare legislation inrecent years. Congress has also given CMSmajor new responsibilities outside ofMedicare, including oversight of privatehealth insurance and administrative simplifi-cation in HIPAA and the SCHIP in BBA.

In the study panel’s estimation, CMS simplydoes not have the capacity to meet all of thedemands on it. This shortage of resourcesmanifests itself throughout the agency inmany ways: inability to implement laws onthe timetable required, uneven oversight andmanagement of the contractors that payMedicare claims, and archaic information sys-tems. While not all the agency’s problemscan be attributed to resource constraints, thestudy panel thinks that many problems couldbe alleviated by giving the agency moreresources.

Recommendation 4

In the absence of a decision by Congressto fundamentally reform Medicare or pro-vide substantial new investment ofresources, both financial and human, thestudy panel urges Congress not to enactmajor changes to the program in the nearterm because CMS does not currentlyhave either the resources or the capacity toimplement such changes in a timely fash-ion while managing the existing programand the changes enacted in the last fewyears. The study panel also urges Congressto shift its focus from micromanagingCMS to giving the agency more adminis-trative latitude to accomplish the goalsCongress sets for it.

While the study panel believes thatCongressional oversight of Medicare is cru-cial, given its share of the federal budget andits importance to beneficiaries and the healthcare system, it thinks that both the numberand the highly specific content of laws passedin recent years have severely taxed theagency’s ability to comply with the require-ments imposed on it. In addition to enactingdetailed legislation, Congress is also veryinvolved in agency matters on an ongoingbasis. Congressional committees, includingnot just authorizing and appropriating com-mittees, but also oversight committees, haveheld scores of hearings, which require signifi-cant preparation on the part of administra-tion witnesses. Congress has also requested alarge number of GAO reports on Medicare,to which the agency typically issues a formalresponse. Moreover, the volume of telephonecalls and letters to the agency from membersof Congress has increased over time;responding to them on a timely basis hasproved to be a significant challenge for theagency.

In the panel’s view, the agency would benefitfrom some respite in implementing new lawsand in greater administrative flexibility.Perhaps even more importantly, the studypanel believes that both the Congress andCMS would benefit from a greater sense oftrust and comity, and urges a public dialogueon how that might be accomplished.

Recommendation 5

Congress should consider removing fromCMS some functions not directly relatedto Medicare or Medicaid so that theagency can focus more on its core mis-sions. Some functions that might beremoved from CMS include oversight ofthe Clinical Laboratory Improvement Act(CLIA) and responsibilities in the HealthInsurance Portability and AccountabilityAct for oversight of private health insur-ance and simplification of health businesstransactions.

To reduce CMS’ responsibilities, policymak-ers could consider removing some of CMS’current functions that do not pertain directlyto Medicare or Medicaid or some functionsthat could be performed by other organiza-tions. It is important to recognize that iffunctions were removed from CMS, anotheragency would require funding to performthose tasks. Transferring funding along withthe functions would defeat the goal of mak-ing more resources available to CMS. In thatcase, the only goal that might be served isallowing CMS to concentrate on fewerresponsibilities.

Functions that could be moved out of CMSinclude any of the following:

■ oversight of private health insuranceplans under HIPAA,

■ responsibility for administrative simplification under HIPAA, and

■ administration of the CLIA.

Some functions, such as administrative sim-plification, oversight of private health insur-ance plans, and enforcement of CLIA, donot relate directly to Medicare’s central mis-sion, and could probably be moved to anoth-er agency without jeopardizing either thosefunctions or Medicare itself. Some wouldargue that giving CMS responsibilities thatare not part of its core mission has under-mined its ability to effectively administerMedicare.

The issue of moving Medicaid and SCHIPout of CMS is complicated because manybeneficiaries are dually eligible for both pro-grams. Coordination between Medicare andMedicaid (primarily through state govern-ments) has long been sub-optimal. ManyMedicare beneficiaries, particularly those wholive in the community, do not know that theymay also be eligible for Medicaid or for assis-tance in paying Medicare premiums. They donot receive the additional benefits offered byMedicaid, including the prescription drugbenefit that so many beneficiaries need.Better coordination of benefits between theStates and the federal government is alsoneeded to ensure that Medicaid is the payerof last resort. Because putting Medicaid andSCHIP under a different agency would prob-ably further erode the coordination of thetwo programs, the study panel does not recommend it.

Some have proposed moving M+C outsideof CMS to an independent board or toOPM. However, these proposals appear tostem more from a belief that CMS eitherdoes not have the appropriate expertise incontracting with health plans or has a bias


against managed care than from a belief thatthe agency has too many responsibilities. IfM+C administration were moved to anotheragency, a great deal of thought would berequired so that beneficiaries would not beconfused, or have to deal with two separateMedicare agencies. These could be particu-larly problematic for beneficiaries who switchback and forth between traditional Medicareand M+C.

Recommendation 6

Congress should furnish CMS with multi-year funding to develop and implementimproved information systems. CMSshould seek expert guidance and assistancein implementing these systems.

The study panel is concerned that CMS isoperating hundreds of archaic informationsystems that are sorely in need of replace-ment. Modern information systems are vitalto helping Medicare accomplish its core mis-sion. Since its successful Year 2000 conver-sion, the agency has made good progress indeveloping new information systems architec-ture, but much work remains. The year-to-year nature of appropriations has hamperedthe agency’s development of long-term plansbecause funding is only assured for one yearat a time. More stable and predictable fund-ing would help CMS to implement a long-term plan for information systems, as wouldrecruitment of staff with expertise in design-ing and implementing highly complex systems.

Recommendation 7

Congress should authorize the Presidentto appoint, subject to Congressional

approval, the Administrator of CMS to afixed term and furnish protection againstarbitrary removal. Congress shouldincrease the salary of the administrator toreflect better the stature and responsibili-ties of the position. The CMS administra-tor’s salary should be commensurate withthe Commissioner of the Social SecurityAdministration.

In an effort to create more stability inMedicare program administration, the studypanel supports the notion of giving the CMSAdministrator additional authority and politi-cal insulation by appointing the Administra-tor to a fixed term.25 This approach main-tains accountability to the President but pro-vides the Administrator with greater indepen-dence. GAO has reported that the experienceof other agencies whose heads have beengiven fixed-term appointments suggests thatthis action will result in longer administrativetenure, but will not prevent a President fromremoving an Administrator when necessary(Scanlon 2000). While the study panel recog-nizes that the evidence about whether a fixedterm increases longevity is inconclusive, par-ticularly with respect to the Surgeon General,it believes that proposals that might lead toincreased longevity warrant consideration.

The administrator’s job, as director of thesecond largest domestic program, is surelyone of the most demanding in government.The study panel thinks it would be appropri-ate to increase the administrator’s compensa-tion to reflect better the demands andresponsibilities of the position. As a bench-mark, the salary of the Commissioner of theSocial Security Administration ($166,700)seems appropriate.


25 This policy option was presented by William Scanlon of the U.S. General Accounting Office in testimony beforethe Senate Finance Committee on May 4, 2000.

Recommendation 8

Congress should grant CMS some relieffrom both limitations on salary and civilservice personnel rules to recruit andretain staff with technical skills (such asactuaries or information systems experts)or highly sought-after expertise.

Since its inception, Medicare has grown dra-matically in size and complexity, but its staffhas not grown at nearly the same rate. Inaddition to needing more staff, the agencyalso needs staff with more complex technicalskills. The agency also would benefit fromstaff with more private sector and clinicalexperience. However, both salary limitationsand the civil service personnel requirementshinder the agency in recruiting and retainingstaff with the skill mix and expertise it needsto manage such a complex program. Somerelief from these requirements would be ben-eficial to CMS, particularly in recruiting staffwith technical or other highly sought-afterexpertise.

ACCOUNTABILITY ANDRESPONSIVENESS

Recommendation 9

To recognize Medicare’s economic, social,and budgetary impact, as well as its rolein the nation’s health care system,Congress should establish a joint commit-tee, without legislative authority, to serveas a source of information and analysis.

In the study panel’s estimation, CMS is sufficiently accountable to the Congress,GAO, and the OIG. The program is subjectto considerable Congressional scrutiny andoversight, from the authorizing and appro-priations committees, oversight committees(including the Senate Special Committee on

Aging), and individual members of Congress.At Congress’ behest, the GAO is also veryinvolved in Medicare oversight. It has issuednumerous reports on Medicare in the lastseveral years that include numerous recom-mendations. From the agency’s perspective, itexpends considerable resources in fulfillingthe increasing number of requests it getsfrom multiple Congressional committees,members of Congress, and the GAO.

The study panel thinks that both Congressand the agency might benefit if a special jointcommittee of the House and Senate wereestablished to coordinate Congressional over-sight of Medicare and give Congress inde-pendent technical expertise on Medicare.The committee could help Congress over-come the lack of institutional knowledge andexpertise that has resulted from a high rate ofCongressional staff turnover. The joint com-mittee could be modeled on the existingJoint Committee on Taxation, which consistsof five members each from the House Waysand Means Committee and the SenateFinance Committee, which have jurisdictionover taxation and revenue. The JointCommittee on Taxation does not haveauthority to legislate on revenue and tax mat-ters; it exists to gather data, conduct researchand investigations, and provide estimates ofproposed tax or revenue bills. It is widelyrespected as a repository of informationabout tax policy, and Congress relies exten-sively on its work.

If the Medicare joint committee were struc-tured in the same way, it would includemembers from the House Committee onWays and Means, The House Committee onEnergy and Commerce and the SenateCommittee on Finance. The joint Medicarecommittee could advise the committees on


how to align better the requirements inMedicare law with the resources available tofulfill these duties. The joint committee alsocould work with CMS to explore the feasibil-ity of various policy options being consideredin Congress and advise Congress on whetherthey could be implemented in accordancewith Congress’ wishes. The committee couldalso examine ways in which Medicare law andregulations could be streamlined.

On the issue of responsiveness, the studypanel’s view is that CMS attempts to beresponsive to Congress in most matters, butis not fully successful. CMS works closelywith Congress and its staff, and the adminis-trator and other senior executives testify fre-quently before Congressional committees.The administrator and other staff also meetoften with members of Congress and staff.On that level, the agency is very responsiveto Congress.

In terms of implementing provisions accord-ing to the timelines set forth in law, theagency has been less successful. Some of thedelays related to the BBA were caused by anexplicit agency decision to postpone imple-mentation of some provisions until theagency was certain that its information sys-tems were Year 2000 compliant. In othercases, the agency simply has not been able tomeet the time frames specified in law,although some have questioned whetherCongress set realistic implementation dates.And, despite several attempts to redesign itscorrespondence to produce more timelyanswers to members of Congress and keystakeholders, CMS has not yet been able todemonstrably increase its response time. Itshould be noted, however, that the volumeof correspondence, particularly from mem-bers of Congress, has increased dramatically

over the last several years. Some of the lettersrelate to Medicare policy options beingdebated in Congress, but a considerablenumber pertain to highly technical matters,sometimes involving specific health careproviders, making it more difficult torespond quickly.

The agency has recently taken some steps toimprove its responsiveness. Under Admin-istrator Thomas Scully’s leadership, CMS hascreated a number of industry forums to listento key stakeholders and has announced itsintent to publish regulations on only one dayper month to make it easier for stakeholdersto identify relevant regulations. Mr. Scullyhas also instituted measures to improve thetimeliness of responses to correspondence.

Recommendation 10

Congress should enact legislation thatgives CMS more flexibility to contractwith new organizations to processMedicare claims. Additional resourcesshould be provided to contractors toenable them to meet the responsibilitieswith which they are entrusted. CMSshould build service standards for cus-tomer service in contracts and devotemore attention to assuring that informa-tion supplied to health care providers istimely, accurate, and easily understandable.

Until recently, CMS has not made providingtimely, accurate, and appropriate assistance tohealth care providers a priority for Medicarecontractors. Emphasis had been placed,instead, on paying claims on a timely basisand on payment safeguards. As a result, cus-tomer service and provider education havebeen inconsistent and of uneven quality. Inlarge measure, lack of focus on provider edu-cation has been the byproduct of extremely


scarce resources and more pressing demandsto focus on payment safeguard activities.Because of legal constraints in contractingauthority, CMS also has had limited flexibilityto take work away from poorly performingcontractors.

Recommendation 11

Congress should provide resources toCMS to provide more assistance to benefi-ciaries with Medicare-related problems bytelephone, via the internet, or by estab-lishing Medicare help desks in SocialSecurity field offices. In any case, thosehelping beneficiaries should have access tobeneficiaries’ claims records.

CMS has made substantial progress inimproving both the quality and the quantityof educational materials to beneficiaries. TheMedicare and You handbook has beenimproved; a 24 hour-a-day telephone callcenter is available to beneficiaries; theMedicare website provides comparative infor-mation for local areas on Medicare +Choiceplans, nursing homes, ESRD facilities, andMedigap plans; and CMS regional officeshold numerous outreach activities to helpbeneficiaries understand their health choices.Still, Medicare is an exceedingly complexprogram and many Medicare beneficiaries donot understand the program sufficiently tomake informed choices. In addition, mostbeneficiaries and their families do not haveaccess to assistance to resolve problems relat-ing to their own care. The study panel thinksthat CMS should devote more resources tobeneficiary education and problem resolu-tion. In their view, it would be particularly

useful if those helping beneficiaries hadimmediate (on-line) access to their healthrecords, and if beneficiaries could obtainassistance in person.26 The study panelbelieves that CMS should consider establish-ing beneficiary assistance centers in someSocial Security field offices.27

Recommendation 12

To assure that beneficiaries and their fam-ilies have the information they need tomake informed choices about Medicare,Congress should provide adequate fund-ing for the National Medicare EducationProgram.

The study panel views an effective educationprogram for beneficiaries and their families asessential to helping them understand a com-plicated program and make informed choices.The National Medicare Education Programhas accomplished much since its creation,and needs to be funded adequately in thefuture.

CREDIBILITY

In the study panel’s view, CMS faces enor-mous challenges to its credibility. Critics ofthe agency vastly outnumber its supporters.While the study panel’s review of Medicarefound significant shortcomings in theagency’s management of Medicare, it alsofound real strengths. Medicare is a function-ing program that pays its bills on a timelybasis. As the largest single purchaser of healthcare in the U.S., its payment systems andcoverage policies are widely emulated in theprivate sector. Most Medicare beneficiaries


26 Access to medical records would be contingent upon compliance with privacy regulations that require approvalfrom a beneficiary or the beneficiary’s designated representative.

27 Vladeck and Cooper recommended this in Making Medicare Better.


also report that they are happy with the carethey get through Medicare.

Many of the problems identified in Medicaremanagement stem from a lack of resources toadminister the program appropriately. Someof the criticism levied against CMS stemsfrom philosophical differences about thestructure of Medicare as a defined benefitprogram operating primarily in a fee-for-

service environment. While Congress and

others continue to debate the future of

Medicare, the study panel urges Congress to

take action now to strengthen one of

America’s most important programs. The

study panel also urges CMS to focus on pro-

viding better services to its business partners

by reducing inappropriate bureaucratic obsta-

cles wherever possible.


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