Major Management Challenges and Program Risks · United States General Accounting Office GAO Performance and Accountability Series January 1999 Major Management Challenges and Program

United States General Accounting Office

GAO Performance and AccountabilitySeries

January 1999

Major ManagementChallenges and ProgramRisks

Department of Health andHuman Services

GAO/OCG-99-7

GAO United States

General Accounting Office

Washington, D.C. 20548

Comptroller General

of the United States

January 1999

The President of the SenateThe Speaker of the House of Representatives

This report addresses the major performance andmanagement challenges that face the Department ofHealth and Human Services (HHS) in carrying out itsmission. It also addresses corrective actions that HHS hastaken or initiated to meet these challenges and furtheractions that are needed. For many years, we havereported significant management problems at HHS. Theseproblems are the result of deficiencies in thecoordination and oversight of HHS’ numerous programs,the data and data systems needed to manage theseprograms, and efforts to safeguard program integrity. Theproblems are particularly critical for the Medicareprogram—our nation’s largest health care insurer.

HHS is making progress in developing a framework forimproving the way the Department is managed. HHS’strategic and performance plans demonstrate theDepartment’s commitment to more effectively andefficiently manage its broad range of programs that arevital to the well-being of the American people.Management reforms—including changes to the Medicareprogram—are under way, but many are in the early stagesof implementation. Given the nature and extent of thechallenges facing HHS in its management of the Medicareprogram, it will take time and sustained attention fromsenior officials to implement reforms and assess their

impact. Consequently, we believe, as we previouslyreported in 1995 and 1997, that these managementdeficiencies, taken together, continue to place theintegrity and accountability of the Medicare program athigh risk.

This report is part of a special series entitled thePerformance and Accountability Series: MajorManagement Challenges and Program Risks. The seriescontains separate reports on 20 agencies—one on each ofthe cabinet departments and on most major independentagencies as well as the U.S. Postal Service. The seriesalso includes a governmentwide report that draws fromthe agency-specific reports to identify the performanceand management challenges requiring attention acrossthe federal government. As a companion volume to thisseries, GAO is issuing an update to those governmentoperations and programs that its work has identified as“high risk” because of their greater vulnerabilities towaste, fraud, abuse, and mismanagement. High-riskgovernment operations are also identified and discussedin detail in the appropriate performance andaccountability series agency reports.

The performance and accountability series was done atthe request of the Majority Leader of the House ofRepresentatives, Dick Armey; the Chairman of the HouseGovernment Reform Committee, Dan Burton; theChairman of the House Budget Committee, John Kasich;the Chairman of the Senate Committee on GovernmentalAffairs, Fred Thompson; the Chairman of the Senate

GAO/OCG-99-7 HHS ChallengesPage 2

Budget Committee, Pete Domenici; and Senator LarryCraig. The series was subsequently cosponsored by theRanking Minority Member of the House GovernmentReform Committee, Henry A. Waxman; the RankingMinority Member, Subcommittee on GovernmentManagement, Information, and Technology, HouseGovernment Reform Committee, Dennis J. Kucinich;Senator Joseph I. Lieberman; and Senator Carl Levin.

Copies of this report series are being sent to thePresident, the congressional leadership, all otherMembers of the Congress, the Director of the Office ofManagement and Budget, the Secretary of Health andHuman Services, and the heads of other majordepartments and agencies.

David M. WalkerComptroller General ofthe United States


Contents

Overview 6

MajorPerformance andManagementIssues

12

Related GAOProducts

47

Performance andAccountabilitySeries

51



Overview

The Department of Health and HumanServices (HHS) is responsible foradministering many diverse and complexprograms to improve the health andwell-being of the American people. In fiscalyear 1998, HHS had budget outlays totalingover $359 billion and a workforce of over57,000 employees. Medicare, the nation’slargest health care insurer, spends far morethan most cabinet departments; last year, ithandled an estimated 800 million claims andpaid out about $200 billion. In addition, HHS

is the largest federal grant-making agency,providing approximately 60,000 grants ayear.

As HHS fulfills this broad range ofresponsibilities, it faces a number of majorperformance and management challenges.One of the most serious challenges is thesolvency of Medicare’s Hospital InsuranceTrust Fund, which funds Medicare part A. Inits 1998 annual report, the Fund’s trusteeboard projected that the Trust Fund facesrapidly escalating deficits and will bedepleted by 2008. The Medicare BipartisanCommission is currently exploring variousoptions to extend Medicare’s financialviability in the long term. Beyond this criticalissue, HHS faces a number of performanceand management challenges that have been


Overview

identified by GAO and HHS’ Office of InspectorGeneral (OIG).

The Challenges

Scope andComplexity of HHSPrograms CreateChallenges WithCoordination,Oversight, andPerformanceMeasurement

Coordinating the efforts of the numerousadministrators of HHS’ programs—whichinclude HHS’ 11 agencies and state and localgovernments—is critical to ensuringprogram efficiency and effectiveness. HHS

must also coordinate with a number of otherfederal, state, and local agencies that haveprograms with similar goals. While HHS

recognizes this need, it has not delineatedhow it plans to ensure effective programcoordination. Certain programcharacteristics—such as those that providestates the flexibility to design their ownprograms—make coordination of effort andoversight a daunting task. Compounding thisdifficulty is the need for the Department todevelop adequate performance measuresthat ensure accountability.


Overview

HHS Needs Reliableand ComprehensiveData and DataSystems to ManagePrograms andAssess Results

HHS does not have access to the data neededto effectively manage the Department’sextensive health insurance programs,grant-making activities, and regulatoryresponsibilities. Developing and maintainingsystems to ensure access to such data,however, is challenging since manyimportant HHS programs are administered byprogram partners, such as state and localgovernments. Yet without these systems, HHS

cannot adequately oversee its programs.Technical concerns about computercapabilities posed by the year 2000 addfurther complexity to this challenge. Ofparticular concern is the possibleinterruption of Medicare services andpayments.

Program Integrity Isa ContinuingChallenge for HHS

Maintaining the integrity of HHS’ largeprograms, especially Medicare, continues tobe a challenge. In the past, we havedesignated Medicare as a high-risk area, andit remains one. Although legislation has beenenacted in the past 2 years to bolster theHealth Care Financing Administration’s(HCFA) oversight capability, initiatives tocurb fraud, waste, abuse, andmismanagement have been slow to develop.Specifically, HCFA has been slow toimplement its new authority to perform


Overview

Medicare payment safeguard activities. Inaddition, the implementation of newpayment systems that are intended to curbrapid spending increases in the Medicareprogram have been stalled because HCFA

needs to get its critical data systems readyfor the year 2000. Furthermore,implementation difficulties threaten thesuccess of HCFA’s Medicare+Choice program.HHS’ financial statement audits also continueto have problems. Specifically, HHS’ inabilityto provide adequate support for certainfinancial statement amounts, such asMedicare accounts receivable and grantaccrual expenses, contributed to the OIG

issuing a qualified opinion on HHS’ fiscal year1997 financial statements. In addition, theOIG reported that HHS and its operatingdivisions do not have a fully functionalintegrated financial reporting system capableof producing complete and reliable financialstatements in a timely manner.

Progress andNext Steps

As required by the Government Performanceand Results Act of 1993, commonly knownas the Results Act, HHS submitted to theCongress a strategic plan for fiscal years1998-2003. While this 5-year plan and theDepartment’s 1999 performance plan providegeneral information about how HHS intends


Overview

to address these challenges, HHS needs to domore to ensure that its programs achieveintended results and that it is an effectivesteward of taxpayer dollars.

HHS’ strategic and performance plansacknowledge the need for internal andexternal coordination. However, HHS needsto provide more information about how itwill coordinate with the state, local, andtribal governments; contractors; and privateentities that are its program and informationpartners. To strengthen programaccountability, HHS needs to continue itsefforts to develop more outcome measuresfor assessing the results of its programs.

HHS’ strategic plan identifies severalinformation technology initiatives that couldhelp HHS achieve some program objectives.However, the plan needs to more clearlydiscuss how HHS intends to identify andcoordinate information technologyinvestments to support departmentwidegoals and missions. HHS’ performance planidentifies data problems that couldundermine the credibility of HHS’performance data, but it does not state howHHS or its agencies plan to address these dataproblems. Furthermore, HHS needs to present


Overview

a comprehensive strategy for addressingYear 2000 compliance problems.

HHS has made progress in its efforts toimprove program integrity. In particular,HCFA has begun using the new programsafeguard authorities provided by theCongress and is taking steps to improve itsinternal controls. However, HCFA needs tomore rapidly implement its new authoritiesand ensure that its systems are Year 2000compliant.


Major Performance and ManagementIssues

HHS’ many missions affect the health andwell-being of everyone in the nation. HHS

provides health insurance for about one inevery five Americans. Its agencies conductmedical research to expand our knowledgeof curing and preventing disease; ensure thesafety of food, drugs, and medical devices;provide health care services to populationswho might otherwise not receive care; helpneedy children and families with incomesupport; and support a range of services tohelp elderly people remain independent.

Managing these diverse and complexprograms is a challenge for HHS, and recentlegislative initiatives have intensified thischallenge. For example, to implementwelfare reform under the PersonalResponsibility and Work Opportunity Act of1996 and subsequent legislation, HHS mustgive states program flexibility whilemaintaining adequate oversight. TheBalanced Budget Act of 1997 (BBA) and theHealth Insurance Portability andAccountability Act of 1996 (HIPAA) gave HCFA

important new resources and tools foroversight of its Medicare program, but theseacts also expanded the agency’s role toinclude significant responsibilities HCFA hadnot previously performed. At the same time,HHS must find a timely resolution to the Year


Major Performance and Management

Issues

2000 computer problem to ensure thecontinued availability of benefits andservices for Medicare and Medicaidbeneficiaries. Furthermore, the solvency ofMedicare’s Hospital Insurance Trust Fund,which funds Medicare part A, is at risk. TheFund’s trustee board projected in its 1998annual report that the Trust Fund will bedepleted by 2008.

Over the past several years, our reports,reports from HHS’ OIG, and the NationalPerformance Review have documentedproblems with HHS’ performance andmanagement and have recommendedreforms. This report highlights some of theserious management challenges related tocoordination and accountability, data andinformation systems, and program integritythat HHS must overcome to meet its strategicgoals. This report also indicates how HHS hasaddressed some of these issues in its 5-yearstrategic plan and its fiscal year 1999 annualperformance plan, which were developed inresponse to the Results Act.



Issues

Scope andComplexity ofHHS ProgramsCreateCoordination,Oversight, andPerformanceMeasurementChallenges

Each of HHS’ 11 operating agenciesadministers a number of programs. Many ofthese agencies have overlappingjurisdictions and concerns, and many oftheir programs share like goals withprograms administered by other federalagencies. To effectively meet these programgoals, coordination both within HHS and withother agencies is essential. Yet suchcoordination is a challenge, given the scopeand complexity of these programs. Inaddition, HHS programs are frequentlyadministered by program partners, includingstate and local governments andnongovernmental organizations that receiveblock grant or categorical funding. HHS needsto make sure that these partners areaccountable for program results, which isoften a challenge because of the flexibilitystates have in administering programs andbecause of limited research on programeffectiveness.

HHS’ strategic and performance plansprovided an opportunity for HHS todemonstrate how it will coordinate itsdiverse programs to achieve commonobjectives. HHS’ strategic plan acknowledgesthe need for coordination among theDepartment’s operating divisions anddescribes a range of approaches for



Issues

improving internal coordination. However,while the plan also mentions the need tocoordinate with state, local, and tribalgovernments; contractors; and privateentities that HHS relies on as program andinformation partners, it does not specify howHHS would do so.

Many HHS ProgramsRequire Internal andExternalCoordination

Within HHS, a large number of programsshare related objectives; many HHS programsalso share objectives with other federalagencies. For example, 27 different HHS

programs support teen pregnancy preventionefforts, and 8 other federal agencies—theDepartments of Agriculture, Defense,Education, Housing and UrbanDevelopment, Justice, and Labor; theCorporation for National Service; and theOffice of National Drug ControlPolicy—provide funding for teen pregnancyprevention programs. With so manystakeholders involved, intraagency andinteragency coordination becomeincreasingly necessary—and complex.

Implementing welfare reform exemplifiesthe coordination challenges HHS faces. Theprincipal responsibility for carrying out thelegislation rests with the Administration forChildren and Families (ACF). In addition to



Issues

coordinating its own programs, whichinclude Temporary Assistance for NeedyFamilies and Head Start, ACF mustcoordinate with related programs in otherHHS agencies, such as those dealing withsubstance abuse and mental health services.HHS must also coordinate with theDepartments of Labor and Educationregarding education, training, andemployment programs that can help formerwelfare recipients. A diverse set of programpartners, such as state and localgovernments and nonprofit andcommunity-based organizations, develop andimplement ACF programs and deliver themany services they sponsor. For example,state and county agencies, the courts, banks,and credit bureaus help ACF implement itschild support enforcement program.Similarly, public and private school systems,community action agencies, and othernonprofit groups operate Head Startprograms locally.

HHS’ 1999 performance plan has a generaldiscussion of the need for internal andexternal coordination, but details aboutcoordination efforts were left to individualagency plans. While some agencies’ planscarefully delineate coordination efforts,others do not provide sufficient information



Issues

to allow the Congress to assess whethertheir activities will be adequatelycoordinated internally and externally. Forexample, it is not clear how numerous HHS

programs will coordinate efforts toaccomplish the President’s stated goal ofreducing smoking among young people by50 percent by 2003—a goal HHS adopted.According to its strategic plan, HHS plans toachieve this goal through research supportby the National Institutes of Health;prevention activities by the Indian HealthServices (IHS), the Centers for DiseaseControl and Prevention (CDC), and the HealthResources and Services Administration;enforcement efforts by the Food and DrugAdministration (FDA); and technicalassistance to states by the Substance Abuseand Mental Health Services Administration(SAMHSA). However, of the agencies that wereidentified as contributing to this effort, onlyFDA and IHS acknowledged in theirperformance plans that they wouldcoordinate their work with the otheragencies.

Balancing ProgramFlexibility andOversight

In administering programs that are the jointresponsibility of state governments or thatinvolve local grantees, HHS must continuallybalance program flexibility with maintaining



Issues

program controls. With welfare reform andother recent legislation, states receivedgreater flexibility in designing andimplementing their assistance programswithin federal guidelines. However, at thesame time, HHS is responsible for ensuringstates comply with federal laws andregulations. The new welfare law also givesHHS authority to impose penalties if statesfail to comply with certain requirements andprovide bonuses if states meet certainperformance standards.

The effectiveness of some HHS strategies toensure that states comply with federalrequirements is questionable. For example,Head Start, which was designed to ensuremaximum local autonomy, uses on-siteinspections as the primary tool for ensuringthat Head Start’s more than 1,400 localgrantees comply with program regulations.Head Start performs on-site inspections aftera grantee’s initial operating year and at leastonce every 3 years after that. We havereported, however, that ACF regional officestaff and outside researchers have raisedconcerns about the consistency of on-siteinspections. Although the full impact of thisproblem is unknown, data based on theseinspections may not be as valuable as theycould be for managing the program and



Issues

making decisions about Head Start policy.We also found that Head Start could do moreto ensure that it accurately measures theprogram’s actual impact by examiningprogram outcomes at the grantee level.

HHS’ weak oversight of programs wherestates share enforcement responsibilities canfail to protect vulnerable citizens. Forexample, nursing homes that receive federalpayments through Medicare andMedicaid—which in 1997 totaled$28 billion—must comply with certainfederal requirements. As required by statute,HCFA delegated to the states responsibility toinspect nursing homes and certify that theymeet federal standards. However, we haveidentified problems in both inspection andenforcement. For example, in analyzingrecent inspection and complaint informationin California, we found that nearly one inthree nursing homes were cited by statesurveyors for providing care with serious orpotentially life-threatening problems.Although the state identified seriousdeficiencies, HCFA’s enforcement policieswere not effective in ensuring that thedeficiencies were corrected and stayedcorrected. This is a national problem—onein nine nursing homes in the United Stateswas cited in its last two inspections for



Issues

conditions that harmed residents or putresidents in immediate jeopardy.

Until recently, HCFA had taken a lenientstance toward enforcing compliance withfederal standards, encouraging states togrant almost all noncompliant homes a graceperiod to correct deficiencies withoutpenalty, regardless of past performance.HCFA is currently developing plans to(1) improve state inspection practices,(2) revise oversight of state inspectionagencies, (3) strengthen enforcement actionsagainst poorly performing nursing homes,and (4) disseminate information toconsumers and providers about nursinghomes’ performance records and about bestpractices for certain common care problems.In addition, recent legislation requires theDepartment of Justice to develop amechanism that would allow nursing homesto check whether potential employees havecriminal or abusive backgrounds.

Developing EffectivePerformanceMeasures CouldStrengthenAccountability

Whether a program’s goal is better nursinghome care or better preschool experiencesfor children in Head Start, HHS needs to beable to adequately measure programperformance to ensure programaccountability. However, program scope and



Issues

complexity—as well as variousmethodological and resourceconstraints—make measuring performancedifficult. For example, in measuring theeffectiveness of drug abuse treatment,certain factors, such as reliance onself-reported information and insufficientclient follow-up, limit confidence in the dataon treatment outcomes. Furthermore,comparisons of study results arecomplicated by differences in how outcomesare defined and measured as well asdifferences in program operations and clientfactors.

HHS’ strategic plan was a serious initial effortto describe goals, objectives, and outcomemeasures of program performance.However, it could have better contributed toefforts to improve accountability bydiscussing the Department’s plans for futureevaluations to determine programeffectiveness. In HHS’ performance plan,many agencies, such as CDC, providedsuccinct and concrete statements ofexpected performance, but others did not.Most of the agencies’ plans provide at leastsome appropriate and quantifiableperformance measures to track progresstoward performance goals. However, HHS

and its agencies acknowledged that future



Issues

performance plans should include moreoutcome goals to supplement output andprocess goals, and they indicated that theyhave begun efforts to develop them.

HHS has made progress in working with stategovernments to develop effectiveperformance measures that promote thegoals of its various programs. For example,the Office of Child Support Enforcement andthe states developed national goals andobjectives for the child support enforcementprogram. The Maternal and Child HealthBlock Grant Program has collaborated withits state partners to develop a set of coreperformance measures that have nowbecome the basis for awarding andmonitoring grants under the program.Furthermore, HHS’ strategic plan indicatesthat SAMHSA is currently working with statesto develop outcome indicators for substanceabuse and mental health services and thatCDC, through its categorical grant programs,is working with states to develop healthstatus indicators, uniform data sets, andpublic health surveillance systems.



Issues

Key Contacts Bernice Steinhardt, DirectorHealth Services Quality and Public Health IssuesHealth, Education, and Human Services Division(202) [email protected]

William J. Scanlon, DirectorHealth Financing and Systems IssuesHealth, Education, and Human Services Division(202) [email protected]

Cynthia Fagnoni, DirectorIncome Security IssuesHealth, Education, and Human Services Division(202) [email protected]

Carlotta Joyner, DirectorEducation and Employment IssuesHealth, Education, and Human Services Division(202) [email protected]



Issues

HHS NeedsReliable andComprehensiveData and DataSystems toManage Programsand AssessResults

To effectively manage its extensive healthinsurance programs, grant-making activities,and regulatory responsibilities, HHS musthave access to data about its programs andtheir effects that are both reliable andappropriate to the task. These data wouldallow HHS to know whether or not it isaccomplishing its goals and how itsprograms affect the American people. Theyalso would provide the Congress theinformation it needs to evaluate theDepartment’s success in meeting its goals.However, data needed to manage andevaluate HHS’ programs are often unavailable,inaccurate, or inconsistent. Obtainingcomparable data from programs carried outby state and local partners is particularlydifficult. The automated systems challengespresented by the year 2000 will simplycompound these problems; they could alsoput benefits and services at risk.

Balancing Flexibilityand AccountabilityCreates DataChallenges

To help fulfill its oversight responsibilities,HHS needs comparable and reliable data fromstates. However, state data, where available,are often incomplete or inconsistent. Forexample, HHS will use state data to ensurestates meet new welfare reformrequirements, including the 5-year time limiton receiving welfare benefits. However, state



Issues

information on the length of time anindividual has received welfare is oftenunavailable or inconsistent, making itdifficult for HHS to enforce federal benefittime limits.

HCFA faces particular challenges in collectingand publishing consistent information toinform policymakers about Medicaid and thenew State Children’s Health InsuranceProgram (SCHIP) created by BBA. Medicaid, a$160-billion federal and state program,provides health insurance coverage for36 million low-income people—about half ofwhom are children; SCHIP was established toexpand health insurance coverage forlow-income children. States have primaryresponsibility for administering theseprograms but share responsibility with HCFA

for data collection and management. HCFA

uses state enrollment data to createstatistical reports on Medicaid beneficiariesserved, their eligibility categories, types ofservices they received, and vendorpayments. However, these data are ofteninaccurate and inconsistent. For example,while HCFA data indicate that Medicaidenrollment has been dropping as statesimplement welfare reform, our review ofthese data in 16 selected states founddiscrepancies between state and HCFA data.



Issues

Similarly, state program variationscomplicate uniform reporting for SCHIP. Forexample, states do not have consistentincome standards for children’s enrollmentin SCHIP, and they vary in how they countfamily income to determine programeligibility. These data problems will make itdifficult to assess the impact of welfarereform on Medicaid enrollment and theoverall effectiveness of SCHIP.

In some cases, the data HHS needs to manageits programs and assure the Congress that itis achieving intended results are notavailable. For example, the federalgovernment provides about $3 billionannually to fund drug abuse prevention andtreatment activities; however, preciselydetermining the need for treatment servicesis difficult due to limitations in national andstate data. SAMHSA’s national estimates ofdrug abuse treatment need are primarilyderived from the agency’s NationalHousehold Survey on Drug Abuse, which,when used for this purpose, has severallimitations, including reliance onself-reported data and the exclusion ofcertain groups at high risk of drug use, suchas persons who are homeless or in prisons. Italso does not identify a large enough sampleof certain subpopulations, such as pregnant



Issues

women, to adequately estimate treatmentneed. State estimates of drug treatment needare also problematic. Although states arerequired to report these estimates inapplications for federal block grant funds,our review of fiscal year 1997 block grantapplications showed that not all statessubmitted such data, and some submittedincomplete or inaccurate data.

Lack of Reliable andComprehensive DataMay Put Individualsat Risk

The data system problems that affect HHS’ability to carry out its oversight andregulatory responsibilities can result in risksto the public’s health. For example, there areweaknesses in FDA’s approach fordetermining whether medical devicemanufacturers are operating trackingsystems capable of quickly locating andremoving defective devices from the marketand notifying patients who use them. Theseweaknesses could result in unnecessaryimpairment—even death—if it becamenecessary to notify patients who use adevice, such as a heart valve or pacemaker,that had been found to be defective.

Detecting problems with pharmaceuticals isparticularly difficult. Eighty percent of bulkpharmaceutical chemicals are imported. Toidentify foreign pharmaceutical



Issues

manufacturers, plan foreign inspections,track inspection results, and monitorenforcement actions, FDA relies on 15separate automated systems, most of whichdo not interface. As a result, essentialforeign drug inspection data are not readilyaccessible to the different FDA units that areresponsible for planning, conducting, andreviewing inspections and takingenforcement actions against foreignmanufacturers.

Year 2000Challenges PutBenefits andServices at Risk

HCFA’s automated, mission-critical systemssupporting the Medicare program are not yetYear 2000 compatible—and time is runningout. Although HCFA recently established aninternal Year 2000 organization and hiredindependent contractors to assist inoverseeing the Year 2000 work, we reportedin September 1998 that HCFA was far behindschedule in repairing, testing, andimplementing these systems due, in part, tothe complexity and magnitude of theproblem. For example, HCFA reported that asof June 30, 1998, less than one-third ofMedicare’s 96 mission-critical systems hadbeen fully renovated, and none had beenvalidated or implemented. (See Status ofHCFA’s Year 2000 Effort: Quarterly ProgressReport [Washington, D.C.: HHS, Aug. 15,



Issues

1998].) If not corrected, these systems couldmalfunction or produce incorrectinformation beginning in January 2000,putting benefits and services in jeopardy.

To help avoid the interruption of Medicareservices and payments, we reported thatHCFA needed to implement several keymanagement practices, including

• developing a risk-management process,• planning for and scheduling an integrated

end-to-end test of all key systems to ensurethat Medicare-wide renovations will work asplanned,

• ensuring that all external and internalsystems’ data exchanges have beenidentified and agreements signed betweenthe data exchange partners, and

• accelerating the development of businesscontinuity and contingency plans to allowtime to ensure that they would be reliableand ready if needed.

HCFA’s Administrator responded that theagency would take immediate steps toaddress our recommendations and wouldtake whatever actions are needed to ensurethat there is no interruption of Medicareservices and claims payments.



Issues

HHS also faces the possibility of massivesystems failures for state Medicaidprograms—but the responsibility for systemsrenovations lies with the states, not directlywith HCFA. Most states are far from havingtheir automated Medicaid systems ready forthe year 2000. Of the 48 states and 3territories that reported on the status of theirsystems in July and August 1998, only 23states had completed more than 50 percentof their systems renovations. HCFA has begunan independent effort to assess states’compliance.

HHS Plans CouldMore Fully AddressData Problems

HHS’ summary overview of its performanceplan discusses the Department’s reliance onits partners and stakeholders for much of thedata that will serve to assess the results ofHHS programs. The plan also mentionsproblems stemming from HHS’ use of existingdata systems that were established tomonitor the use of resources and to provideaggregate output data rather than to capturethe outcomes of activities. However, most ofthe plan’s discussions of data limitations donot state how HHS or its agencies plan toaddress these data problems, which couldundermine the credibility of performancedata. Furthermore, individual agencies didnot always provide sufficient information on



Issues

data limitations, including some datalimitations we had identified in previouswork, making it difficult to assess agencyprogress to overcome them.

Although HHS’ strategic plan identifiesseveral information technology initiativesthat could help HHS achieve some programobjectives, the plan does not discuss howHHS intends to identify and coordinateinformation technology investments tosupport departmentwide goals and missions.Nor does the performance plan discusseither HHS-wide information technologyresources needed to improve performanceor a comprehensive strategy for addressingYear 2000 compliance problems.

Key Contacts Bernice Steinhardt, DirectorHealth Services Quality and Public Health IssuesHealth, Education, and Human Services Division(202) [email protected]



Issues

William J. Scanlon, DirectorHealth Financing and Systems IssuesHealth, Education, and Human Services Division(202) [email protected]


Joel C. Willemssen, DirectorCivil Agencies Information SystemsAccounting and Information Management Division(202) [email protected]

Program IntegrityIs a ContinuingChallenge forHHS

With their broad range of services, largenumber of grantees and contractors, hugevolume of vendor payments, and millions ofbeneficiaries, HHS programs are attractivetargets for fraud, waste, abuse, andmismanagement. Medicare is particularlyvulnerable—it pays out about $200 billionannually and is responsible for financinghealth services delivered by hundreds ofthousands of providers on behalf of tens of



Issues

millions of beneficiaries. In the past, we havedesignated the Medicare program as ahigh-risk area, and it remains one. HHS’ OIG

estimated that in fiscal year 1997, HCFA paidabout $20 billion for fee-for-service claimsthat did not comply with Medicare laws andregulations. While the Congress has givenHHS new resources and authorities toimprove oversight of Medicare, HCFA’sdeployment of these tools has lagged,putting on hold potential gains expectedfrom the Medicare Integrity Program,Medicare’s prospective payment systems,and Medicare+Choice. Furthermore, effortsto streamline Medicare’s claims processingsystem have stalled, as HCFA has focused itsefforts on getting the critical data systemsready for the year 2000. Finally, HHS’ fiscalyear 1997 financial statements had seriousdeficiencies.

HCFA Slow toImplement NewAuthority to PerformPayment SafeguardActivities

The Medicare Integrity Program createdunder HIPAA was intended to bolster HCFA’sflagging efforts to combat fraud and abuse.The insurance companies HCFA contractswith to process, pay, and review Medicareclaims are paid to review claims and detectfraudulent and abusive billing practices toprevent mispayments. The Congressincreased funding for these and other



Issues

payment safeguard activities, appropriatedthe funding in advance rather than annually,and protected it from potential diversion byplacing the funds in a special fraud andabuse account. In addition, the Congressgave HCFA—through HHS—the authority tocontract with specialists to perform paymentsafeguard activities.

However, HCFA has been slow to act. Forfiscal year 1998, HCFA did not notifycontractors of their annual safeguardfunding amounts until a third of the fiscalyear had passed. The contractors use thesefunds, among other things, to hire and retainstaff knowledgeable in conducting provideraudits, claims reviews, and payment dataanalyses. The delays, they believed, wouldmake it more difficult to complete theirpayment safeguard work, thus frustrating theMedicare Integrity Program’s intendedpurpose. Since the time of our review, HCFA

stepped up its efforts and set contractors’fiscal year 1999 budgets promptly. However,HCFA has not yet implemented a specialtyprogram safeguard contract owing to variousundecided issues, such as which specificsafeguard tasks HCFA will ask the contractorto perform and the best geographic locationfor testing the first contract. Such a contractcould be awarded in May 1999, but the scope



Issues

will be very limited and will not providemany of the benefits initially envisionedfrom using a specialty contractor.

Year 2000 andDesign ChallengesStall Implementationof MedicareProspective PaymentSystems

Until recently, Medicare used costreimbursement methods to pay for servicessuch as home health care, skilled nursingfacility (SNF) care, and hospital outpatientservices. In 1996, spending for these serviceshad reached double-digit spending growth.In an effort to encourage efficient servicedelivery and discourage rapid spending, BBA

mandated the design and implementation ofprospective payment systems (PPS), whichpay providers—regardless of theircosts—fixed, predetermined amounts thatvary according to patient need. Specifically,BBA requires HHS—and, by extension,HCFA—to implement (1) a SNF PPS, whichbecame effective in fiscal year 1998; (2) ahome health services PPS by fiscal year 1999and an interim payment system for theseservices, effective fiscal year 1997; (3) ahospital outpatient services PPS by calendaryear 1999; and (4) an inpatient rehabilitationservices PPS by fiscal year 2001.

Challenges in developing and implementingthese systems pose significant risks:



Issues

• Payment design difficulties: Under PPS, HCFA

must carefully monitor the accuracy of dataused to develop payment levels. It must alsodevelop effective payment adjusters toaccount for the cost differences in treatingpatients who are more or less expensivethan average to serve. Under a system offixed payments, inaccurate cost data and thelack of an effective adjuster can result inunderpaying or overpaying providers;moreover, if providers serving expensivepatients are financially penalized, futureaccess for these beneficiaries is jeopardized.In the case of the SNF PPS, we found that themethodology HCFA used to adjust rates forpatient differences is susceptible tomanipulation and could raise Medicareoutlays rather than improve efficiency andpatient care. We also found that, because thedata used to set the prospective rates werenot adequately audited, overstated costs ofproviding services were built into the newrates. Therefore, the use of these data maycompromise the system’s ability to meet thetwin objectives of slowing spending growthwhile promoting the delivery of appropriatebeneficiary care.

• Implementation delays: HCFA has announcedthat the home health PPS and outpatient PPS

will be not be implemented by the 1999deadline because of the agency’s focused



Issues

efforts to ensure that Medicare’s multipleautomated systems are Year 2000 compliant.The inpatient rehabilitation therapy PPS

could face similar delays. To the extent thatdelays prolong the use of the existingcost-based reimbursement methods or that arushed implementation builds problems intoa new system, Medicare will likely continueto make excessive payments for services inthese areas.

ChallengesImplementingMedicare+ChoiceThreaten ProgramSuccess

On the premise that managed care plans cansave the government unnecessary spendingon Medicare services without compromisingthe provision of covered benefits, BBA

established Medicare+Choice. The programis designed to widen beneficiary and healthplan participation in Medicare managed carein several ways. First, BBA’s guarantee of aminimum payment level can encouragehealth plans to locate in areas they had notpreviously served. Second, it expanded thetype of plans eligible to contract withMedicare to include—in addition to healthmaintenance organizations—other models,such as preferred provider organizations andphysician-sponsored organizations. Third,BBA requires the development of anationwide campaign that woulddisseminate to beneficiaries useful



Issues

information on the choices available, thuspromoting more effective competitionamong plans.

However, several key challenges imperil theimplementation of the Medicare+Choiceprogram:

• Payment design difficulties: Medicare’spayment rates may overcompensate someplans for the beneficiaries they servebecause the rates paid for enrolledbeneficiaries whose expected use of healthservices is below average are not adequatelyadjusted to reflect that lower expected use.Although HCFA is currently working todevelop new adjustments, as required byBBA, it is having difficulty collecting theencounter data needed to refine theseadjustments.

• Inadequate oversight of allowable profits:The BBA requirement that HCFA auditone-third of all Medicare managed care plansannually could help ensure that plans do notearn excessive profits on their Medicarecontracts. However, studies by HHS’ OIG andothers find HCFA’s current oversight in thisarea inadequate, and HCFA does not plan tobegin these audits until 2000.

• Faltering plan participation: Participation bythe newly permitted types of managed care



Issues

plans has not occurred as intended. To date,only a handful of such plans have submittedapplications to HCFA. In addition, some ofMedicare’s traditional managed care plansare pulling out of certain areas or arereducing covered services and increasingbeneficiaries’ out-of-pocket costs.

• Information campaign challenges:Recognizing that consumer information is anessential component of a competitivemarket, BBA mandated a national informationcampaign with the objective of promotinginformed plan choice. Specifically, BBA

requires that comparative information beavailable to beneficiaries through theInternet, through a toll-free telephonenumber, and in printed form by mail.Organizing these efforts is an enormousundertaking and is a new HCFA responsibility.The toll-free number and a beneficiaryhandbook mailing are being piloted in fivestates. Beginning in 1999, HCFA plans toexpand its telephone information effortsnationwide in support of an annualenrollment event in November. TheCongress’ efforts to encourage the growth ofmanaged care could be thwarted ifbeneficiaries are confused, instead ofenlightened, about their many health carechoices.



Issues

Efforts to StreamlineMedicare ClaimsProcessing SystemHave Stalled

A continuing challenge to HCFA’s ability tomaintain the integrity of Medicare is itseffort to streamline the Medicare claimsprocessing system. HCFA undertook thiseffort to increase the efficiency of its claimsprocess, better manage contractors, improvecustomer service, and help reduce fraud andabuse.

The streamlining involves reducing thenumber of claims processing softwaresystems from eight to three, one of whichwould process only durable medicalequipment claims. However, HCFA halted thisconsolidation effort because it needed tofocus resources on critical Year 2000 work,dealing a major setback to the effort in theshort term.

HHS’ FinancialStatement AuditsContinue to HaveProblems

An area of HHS vulnerability on which HHS’OIG has reported is HHS’ difficulty incomplying with the requirements of theChief Financial Officers Act, as expanded bythe Government Management Reform Act of1994. HHS received a qualified opinion fromthe OIG on its fiscal year 1997 financialstatements, primarily because of (1) a lack ofadequate supporting documentation for $2.5billion in net Medicare accounts receivable;(2) difficulty in determining what, if any,



Issues

adjustments needed to be made to theMedicare cost settlements as reported in thefiscal year 1997 financial statements;(3) insufficient evidence to support $2.7billion in grant accrual expenses and apotential net misstatement of $386 million ingrant expenses; and (4) lack of supportingdocumentation for intraagency transactions.These serious deficiencies indicate thatreliable financial management data are notreadily available to permit HHS managers tomake informed decisions. In this regard, theOIG reported material weaknesses in internalcontrols and a material instance ofnoncompliance with the Federal FinancialManagement Improvement Act of 1996.

Specifically, HHS’ OIG reported serious controlweaknesses affecting the reliability,confidentiality, and availability of datathroughout the Department. It reported thatthe six primary accounting systems are notelectronically linked; depend on externalsources, such as Medicare contractors, foressential information; and cannotautomatically generate financial statements.In addition, Medicare contractors were notadequately protecting confidential personaland medical information associated withclaims. As a result, contractor employeescould potentially browse data on individuals,



Issues

search out information on acquaintances orothers, and possibly sell or otherwise usethis information for personal gain ormalicious purposes. Furthermore, althoughHCFA had corrected weaknesses found in theprevious year, it was still possible to gainaccess to HCFA’s database and modifymanaged care files.

HHS has recognized the need to protect thesecurity of information technology systemsand the data contained in them. Starting in1997, HHS began to revise security policiesand guidance and required each majoroperating division to develop and implementcorrective action plans to address eachmajor weakness identified by the OIG.However, due to its decision to focus onYear 2000 modifications, HCFA will probablynot address many of these electronic dataprocessing control weaknesses in the nearfuture. Therefore, concerns related to theintegrity of claims paid and theconfidentiality of medical records willcontinue.

In addition, the fiscal year 1997 financialstatement audit again reported HCFA’sinadequate oversight of the Medicareprogram as a material weakness—one thathampers HHS’ fiduciary responsibilities. For



Issues

example, HCFA had not developed its ownprocess for estimating the national error ratefor improper Medicare fee-for-servicepayments. For fiscal year 1997, HHS’Inspector General estimated that about 11percent of all Medicare fee-for-servicepayments for claims, or about $20 billion, didnot comply with Medicare laws andregulations. Similarly, we reported in ourfirst audit of the federal government thatproblems exist in estimating improperpayments for major programs, and amongthese were programs administered by HHS.

While HHS’ strategic plan recognizes theimportance of improving the Department’sfinancial management information, it doesnot specify the corrective actions andtimetables needed to obtain an unqualifiedor clean opinion on its financial statements.When financial management issues areclosely related to accomplishing an agency’smission, the agency’s performance planshould include goals related to improving thereliability and timeliness of financial data.HCFA and IHS included such goals in theirplans. The plans of other operatingdivisions—such as ACF, whose fiscal year1997 financial statement audit found severalfinancial accountability deficiencies—could



Issues

also have benefited from financial-relatedgoals.

Key Contacts William J. Scanlon, DirectorHealth Financing and Systems IssuesHealth, Education, and Human Services Division(202) [email protected]

Bernice Steinhardt, DirectorHealth Services Quality and Public Health IssuesHealth, Education, and Human Services Division(202) [email protected]




Issues

Gloria L. Jarmon, DirectorHealth, Education, and Human Services Accounting and Financial ManagementAccounting and Information Management Division(202) [email protected]



Issues

Joel C. Willemssen, DirectorCivil Agencies Information SystemsAccounting and Information Management Division(202) [email protected]


Related GAO Products

Coordination,Oversight, andPerformanceMeasurement

Teen Pregnancy: State and Federal Efforts toImplement Prevention Programs andMeasure Their Effectiveness (GAO/HEHS-99-4,Nov. 30, 1998).

California Nursing Homes: Care ProblemsPersist Despite Federal and State Oversight(GAO/HEHS-98-202, July 27, 1998).

Head Start: Challenges in MonitoringProgram Quality and Demonstrating Results(GAO/HEHS-98-186, June 30, 1998).

Grant Programs: Design Features ShapeFlexibility, Accountability, and PerformanceInformation (GAO/GGD-98-137, June 22, 1998).

The Results Act: Observations on theDepartment of Health and Human Services’Fiscal Year 1999 Annual Performance Plan(GAO/HEHS-98-180R, June 17, 1998).

Drug Abuse: Research Shows Treatment IsEffective, but Benefits May Be Overstated(GAO/HEHS-98-72, Mar. 27, 1998).

Department of Health and Human Services:Strategic Planning and AccountabilityChallenges (GAO/T-HEHS-98-96, Feb. 26, 1998).



The Results Act: Observations on theDepartment of Health and Human Services’April 1997 Draft Strategic Plan(GAO/HEHS-97-173R, July 11, 1997).

Child Support Enforcement: ReorientingManagement Toward Achieving BetterProgram Results (GAO/HEHS/GGD-97-14, Oct. 25,1996).

Data and DataSystems

Year 2000 Computing Crisis: Readiness ofState Automated Systems to Support FederalWelfare Programs (GAO/AIMD-99-28, Nov. 6,1998).

Medicare Computer Systems: Year 2000Challenges Put Benefits and Services inJeopardy (GAO/AIMD-98-284, Sept. 28, 1998).

Medical Devices: FDA Can Improve Oversightof Tracking and Recall Systems(GAO/HEHS-98-211, Sept. 24, 1998).

Information Security: Serious WeaknessesPlace Critical Federal Operations and Assetsat Risk (GAO/AIMD-98-92, Sept. 23, 1998).

Drug Abuse Treatment: Data LimitationsAffect the Accuracy of National and State



Estimates of Need (GAO/HEHS-98-229, Sept. 15,1998).

Welfare Reform: States Are RestructuringPrograms to Reduce Welfare Dependence(GAO/HEHS-98-109, June 18, 1998).

Food and Drug Administration:Improvements Needed in the Foreign DrugInspection Program (GAO/HEHS-98-21, Mar. 17,1998).

Blood Supply: FDA Oversight and RemainingIssues of Safety (GAO/PEMD-97-1, Feb. 25, 1997).

Program Integrity Medicare Managed Care: Payment Rates,Local Fee-for-Service Spending, and OtherFactors Affect Plans’ Benefit Packages(GAO/HEHS-99-9R, Oct. 9, 1998).

Financial Management: Federal FinancialManagement Improvement Act Results forFiscal Year 1997 (GAO/AIMD-98-268, Sept. 30,1998).

Balanced Budget Act: Implementation of KeyMedicare Mandates Must Evolve to FulfillCongressional Objectives (GAO/T-HEHS-98-214,July 16, 1998).



Medicare: Health Care Fraud and AbuseControl Program Financial Report for FiscalYear 1997 (GAO/AIMD-98-157, June 1, 1998).

Medicare: HCFA’s Use ofAnti-Fraud-and-Abuse Funding andAuthorities (GAO/HEHS-98-160, June 1, 1998).

Medicare Managed Care: InformationStandards Would Help Beneficiaries MakeMore Informed Health Plan Choices(GAO/T-HEHS-98-162, May 6, 1998).

Financial Audit: 1997 Consolidated FinancialStatements of the United States Government(GAO/AIMD-98-127, Mar. 31, 1998).

Medicare: Recent Legislation to MinimizeFraud and Abuse Requires EffectiveImplementation (GAO/T-HEHS-98-9, Oct. 9,1997).

Medicare HMOs: HCFA Could Promptly ReduceExcess Payments by Improving Accuracy ofCounty Payment Rates (GAO/T-HEHS-97-78,Feb. 25, 1997).


Performance and Accountability Series

Major Management Challenges and ProgramRisks: A Governmentwide Perspective(GAO/OCG-99-1)

Major Management Challenges and ProgramRisks: Department of Agriculture(GAO/OCG-99-2)

Major Management Challenges and ProgramRisks: Department of Commerce(GAO/OCG-99-3)

Major Management Challenges and ProgramRisks: Department of Defense (GAO/OCG-99-4)

Major Management Challenges and ProgramRisks: Department of Education(GAO/OCG-99-5)

Major Management Challenges and ProgramRisks: Department of Energy (GAO/OCG-99-6)

Major Management Challenges and ProgramRisks: Department of Health and HumanServices (GAO/OCG-99-7)

Major Management Challenges and ProgramRisks: Department of Housing and UrbanDevelopment (GAO/OCG-99-8)



Major Management Challenges and ProgramRisks: Department of the Interior(GAO/OCG-99-9)

Major Management Challenges and ProgramRisks: Department of Justice (GAO/OCG-99-10)

Major Management Challenges and ProgramRisks: Department of Labor (GAO/OCG-99-11)

Major Management Challenges and ProgramRisks: Department of State (GAO/OCG-99-12)

Major Management Challenges and ProgramRisks: Department of Transportation(GAO/OCG-99-13)

Major Management Challenges and ProgramRisks: Department of the Treasury(GAO/OCG-99-14)

Major Management Challenges and ProgramRisks: Department of Veterans Affairs(GAO/OCG-99-15)

Major Management Challenges and ProgramRisks: Agency for International Development(GAO/OCG-99-16)



Major Management Challenges and ProgramRisks: Environmental Protection Agency(GAO/OCG-99-17)

Major Management Challenges and ProgramRisks: National Aeronautics and SpaceAdministration (GAO/OCG-99-18)

Major Management Challenges and ProgramRisks: Nuclear Regulatory Commission(GAO/OCG-99-19)

Major Management Challenges and ProgramRisks: Social Security Administration(GAO/OCG-99-20)

Major Management Challenges and ProgramRisks: U.S. Postal Service (GAO/OCG-99-21)

High-Risk Series: An Update (GAO/HR-99-1)

The entire series of 21 performance and

accountability reports and the high-risk

series update can be ordered by using

the order number GAO/OCG-99-22SET.


Ordering Information

The first copy of each GAO report and testimony

is free. Additional copies are $2 each. Orders

should be sent to the following address,

accompanied by a check or money order made

out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards

are accepted, also. Orders for 100 or more

copies to be mailed to a single address are

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th & G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling

(202) 512-6000 or by using fax number

(202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available

reports and testimony. To receive facsimile

copies of the daily list or any list from the past

30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide

information on how to obtain these lists.

For information on how to access GAO reports

on the INTERNET, send an e-mail message with

"info" in the body to: [email protected]

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100