CMS Paid Most of the $1 Billion of MMA Funds to Contractors

Congress appropriated to CMS $1 billion to fund start-up administrative  costs to implement MMA provisions. According to CMS  financial data, CMS obligated $974.6 million and, from January 2004  through December 2006, expended over $908 million, of which about  $735 million or 81 percent was paid to contractors and vendors for a  variety of services. Payments were also made for services provided by  other federal and state agencies, for CMS employee-related expenses, and  for purchase card transactions. Because the help line’s call volume  significantly increased with the anticipation of the new prescription  drug benefit, CMS used MMA funds to expand help line operations  and fund a portion of help line costs. Payments using purchase cards: CMS paid $2.0 million using  purchase cards to acquire office supplies, outreach materials, and  information technology equipment. According to information provided by OAGM management, as of  September 30, 2007, CMS’s contract closeout backlog was approximately  1,300 contracts with a total contract value of approximately $3 billion. CMS Made Nearly $90 Million of Questionable Payments to Contractors

Because of the risks in CMS’s contracting practices and pervasive internal  control deficiencies, CMS was highly vulnerable to waste and improper  payments. Table 3 summarizes the questionable  payments we identified. Further, provisional indirect cost  rates have not been established. Therefore, we could not verify the  amounts billed. Conclusions

CMS management has not allocated sufficient resources, both staff and  funding, to keep pace with recent increases in contract awards and  adequately perform contract and contractor oversight. This poor operating  environment created vulnerabilities in the contracting process. In response to our recommendations to improve controls over its  contracting process and related payments, CMS stated in its comments  that it has taken or will take the following actions:    continue to evaluate and update its policies and procedures to make  review its policies and criteria for the use of cost reimbursement  contracts and the need for approved accounting systems,  review and update policies and procedures as appropriate and provide  training regarding subcontracting,    develop appropriate procedures to support HHS in its cognizant federal    update its invoice review and payment policies and procedures as    develop comprehensive training on the invoice review and approval  require the use of a governmentwide system to track the training taken  by personnel assigned to contract oversight,    continue to reduce its backlog of contracts awaiting closeout, and   obtain contract audits related to our identified questionable payments  and seek reimbursement for any costs found to be unallowable. In some cases, due to the facts and  circumstances involved, we were unable to determine whether or to what  extent the costs were allowable, reasonable, and allocable. Appendix II: Scope and Methodology

To determine how the Centers for Medicaid and Medicare Services (CMS)  used the $1 billion Medicare Prescription Drug, Improvement, and  Modernization Act of 2003 (MMA) appropriation, we obtained obligation  and disbursement transactions from CMS’s financial systems from the  period January 2004 through December 2006 that CMS charged against the  MMA appropriation. Because Medicare contracts were not subject to FAR, we did not  include this contract in our internal control review. To determine whether payments to contractors were properly supported  as a valid use of government funds, we started with the same 67 contracts  we had nonstatistically selected. We questioned payments for costs that were potentially improper by  assessing whether the costs did not comply with the terms of the contract  or applicable regulation (FAR, the Health and Human Services Acquisition  Regulation, and Federal Travel Regulation) or that were unsubstantiated  because the contractor did not provide adequate support for us to  determine whether the costs were allowable.
Why GAO Did This Study

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) established a voluntary outpatient prescription drug benefit, which is administered by the Centers for Medicare and Medicaid Services (CMS). CMS relies extensively on contractors to help it carry out its basic mission. Congress appropriated to CMS $1 billion for start-up administrative costs to implement provisions of MMA. Because CMS had discretion on how to use the appropriation, Congress asked GAO to determine (1) how CMS used the $1 billion MMA appropriation, (2) whether CMS's contracting practices and related internal controls were adequate to avoid waste and to prevent or detect improper payments, and (3) whether payments to contractors were properly supported as a valid use of government funds. To address objectives two and three above, our review extended beyond contract amounts paid with MMA funds.

What GAO Found

CMS expended over 90 percent of the MMA appropriation by the end of December 2006. The majority, about $735 million, was paid to contractors and vendors for a variety of services. For example, because the volume of calls to the 1-800-MEDICARE help line significantly increased with the new outpatient prescription drug benefit, two contractors were paid about $234 million to support the help line. CMS also made payments to other federal agencies for services such as printing and mailing; to state agencies to fund educating the public; for CMS employee payroll and travel costs; and for purchase card transactions to acquire office supplies, equipment, and outreach materials. CMS management has not allocated sufficient resources, both staff and funding, to keep pace with recent increases in contract awards and adequately perform contract and contractor oversight. This operating environment created vulnerabilities in the contracting process. Specifically, CMS did not adequately fulfill critical contractor oversight, such as working with contractors to establish indirect cost rates. Further, certain contracting practices, such as the frequent use of cost reimbursement contracts, increased risks to CMS. After contract award, pervasive internal control deficiencies increased the risk of improper payments. Because CMS did not have clear invoice review guidance, invoice review procedures were often flawed or did not take place. CMS also had not taken steps to ensure contracts were closed within required deadlines and had a backlog of approximately 1,300 contracts as of September 30, 2007. GAO identified numerous questionable payments totaling nearly $90 million. These payments were for costs not compliant with contract terms, which could be potentially improper; costs for which we could not obtain adequate support to determine whether the costs were allowable; and potential waste caused by risks in CMS's contracting practices. Importantly, in some cases, because we were not able to determine whether or to what extent the costs were allowable, some of the questioned amounts may relate to allowable costs that are not recoverable. The table below summarizes the questionable payments GAO identified.