The FAR generally requires  agencies to conduct full and open competition for contracts. CMS’s Contracting Reform Plan Does Not Fully Address Three Critical Implementation Areas

While CMS’s contracting reform plan provides detailed information in  some areas, it does not comprehensively address (1) contracting reform  risks and how the agency plans to mitigate them; (2) the intended  approach for implementing certain aspects of MAC contracting, including  details on how CMS will monitor MACs’ performance; and   (3) coordination of contracting reform activities with other complex  initiatives that CMS is implementing. Each of these risks has the potential to  disrupt claims administration services, resulting in delayed or improper  payments to providers. The Report to Congress—one of the documents in CMS’s contracting  reform plan—briefly noted that the anticipated implementation schedule  “will require substantial risk management and schedule precision to  minimize possible operational disruption.” CMS’s proposed  implementation schedule calls for all work to be transferred to MACs by  July 2009—more than 2 years ahead of the MMA’s time frame. Although CMS has regularly  managed the transitions of claims administration contractors’ workloads  and functions and has much experience in doing so, recent transitions  have affected only about 10 percent of the claims for Part A and Part B in  any year. Furthermore, the MAC  transitions will be more complex than past contractor transitions because  both Part A and Part B workloads will be transferred from multiple  contractors to a single MAC in a new jurisdiction. These changes mean, for  example, that under the initial A/B MAC contract that is awarded—one  that involves less than 3 percent of the national workload in a six-state  jurisdiction—CMS will simultaneously transfer as many as nine separate  segments of current contractors’ workload to the new MAC. Interrupting providers’ cash flow by failing to pay them can create  significant problems in their operations. Plan’s Cost and Savings Estimates Do Not Provide a Reasonable Basis for Decision Making

CMS’s plan includes estimated costs and savings for Medicare as a result  of contracting reform, but the estimates are too uncertain to provide a  reasonable basis for making implementation decisions. Cost Estimates Depend on Uncertain Outcomes

In its plan, CMS estimated that the costs to implement contracting reform  from 2006 to 2011 would total about $666 million. Therefore, whether  contracting reform will actually achieve the $1.4 billion savings is highly  uncertain. Potential savings from improved fraud detection are also impossible to  quantify, based on current information. The agency has opted to transfer the entire  current contractor workload to MACs 2 years ahead of the MMA time  frame, in the hope of garnering savings to Medicare as quickly as possible. The accelerated schedule raises concerns for a number of reasons. We believe that by accelerating its  implementation schedule to transfer the entire Medicare claims processing  workload to MACs by July 2009, CMS is assuming an unnecessary risk. Appendix I: Documents CMS Officials Have Identified as Constituting the Agency’s Plan for Implementing Contracting Reform

The Centers for Medicare & Medicaid Services (CMS) has designated its  report, entitled Report to Congress: Medicare Contracting Reform: A  Blueprint for a Better Medicare, and the documents underlying this report  as its plan for implementing Medicare fee-for-service contracting reform. § 1395kk-1). We developed evaluation criteria to  assess the extent to which CMS’s plan provides an appropriate framework  to implement Medicare contracting reform. To assess the extent to which the plan’s cost and savings estimates were  sound enough to support decision making on implementation, we  reviewed CMS’s estimates for administrative costs and savings, savings to  the Medicare trust funds, and supporting documentation.
Why GAO Did This Study

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

What GAO Found

CMS's plan provides an appropriate framework to implement contracting reform in some critical areas but not in others. For example, the plan indicates the rationale for reform but lacks a detailed schedule to coordinate reform activities with other major initiatives CMS intends to implement at the MACs during the same period. Further, CMS's plan does not comprehensively detail steps to address potential risks during the transitions of the claims workload from the current contractors, such as failing to pay providers or paying them improperly. These transitions will be complex to manage because they require moving multiple claims workloads from current contractors to a single MAC with new jurisdictional lines. As many as nine separate segments of current contractors' workload will be moved to the first A/B MAC. CMS has accelerated its schedule to transfer the current contractor claims workload to MACs by 2009, more than 2 years ahead of the MMA's time frame. This schedule leaves little time for CMS to adjust for any problems encountered. CMS's estimates of costs and savings are too uncertain to support decisions on contracting reform implementation. First, CMS's internal cost estimate for a 6-year implementation period of about $666 million is based on reasonable data but questionable assumptions about contract awards. Second, its estimate of $1.4 billion in savings from reductions in improper payment by MACs depends on questionable evidence and assumptions that were never validated by knowledgeable CMS staff. However, the $1.4 billion estimate prompted CMS to accelerate its implementation schedule to accrue savings as rapidly as possible. While it is reasonable to assume that contracting reform will result in savings, the actual amount could differ greatly from the estimate. Basing an accelerated implementation schedule on uncertain savings raises concerns that CMS has unnecessarily created additional challenges to effectively managing the risk of these transitions.