Statement of the Medicare Administration Committee, Silver Spring, Maryland

CIGNA Health Insurance Corporation . Cooperativa de Seguros de Vida de Puerto Rico
Group Health Incorporated . Mutual of Omaha Insurance Company
National Heritage Insurance Company . Nationwide Mutual Insurance Company
Wisconsin Physicians Service Insurance Corporation

The member companies of the Medicare Administration Committee are substantially involved in the administration of the Medicare program as carriers and intermediaries. During Fiscal Year 2001, we processed 256 million Part B claims and 16 million Part A claims. We appreciate this opportunity to comment on the Medicare contracting reform provisions of H.R. 2768, the proposed "Medicare Regulatory and Contracting Reform Act of 2001"

For several years, the Administration has been recommending that Congress enact its "contractor reform" proposal, which would allow the Center for Medicare and Medicaid Services (CMS) to restructure its contracting process and drastically reconfigure the administrative structure of the Medicare program. The General Accounting Office and the Office of Inspector General of the Department of Health and Human Services have endorsed the concepts put forth by the Administration.

H.R. 2768 is aimed in part at modernizing Medicare's contracting for the processing and payment of Medicare claims as well as education and services provided to providers of care and beneficiaries. Section 4 of the bill embodies many of the contracting changes being sought by the Administration. It would:

• Create a new class of contracting entities, "Medicare Administrative Contractors", (MACs) replacing the current Medicare Part A intermediaries and Part B carriers.
• Eliminate the current law requirement for cost-reimbursement contracts, allow contracting in any manner allowed by the Federal Acquisition Regulation (FAR), and require that contractors be provided with financial incentives for quality and efficiency.
• Eliminate the current Part A right of hospitals to select their fiscal intermediaries and the Part B requirement that carriers be insurance companies.
• Allow CMS to contract for specified Program Management functions individually or in any combination it wishes with any entity it deems qualified.
• Require competition in the procurement of MAC services, with some exceptions.
• Eliminate current law provisions that protect carriers and intermediaries when their contracts are terminated by either the government or themselves.
• Increase the liabilities that contractors may incur in the performance of their responsibilities.

CMS believes that revisions in its contracting authority will enable it to reduce overall Medicare program management costs through price competition and by reducing the number of Medicare fee-for-service contractors, to achieve further economies of scale. It also hopes to achieve greater efficiency through the use of specialized, "functional" contractors. However, the agency has not indicated with any degree of specificity how it would employ the broader contracting authority it seeks.

COMMENTS

We believe that appropriate changes should be made in the way the government contracts for the services provided by carriers and intermediaries. For example, our companies would welcome the opportunity to earn a reasonable profit as MACs.  Nor do we oppose competitive contracting - provided the entities involved are clearly qualified to perform the complex operations involved in processing Medicare fee-for-service claims and related activities. But, we doubt that the mandatory 4-year competitive procurement cycle envisioned by H.R. 2768 would be the best way to implement competition - given the immense scale and complexity of the Medicare program. The cost and disruption of conducting four or five major competitive procurements each year would be a major expense and disruption for CMS and contractors to deal with and would probably not yield the results that could be achieved by a more targeted approach.

Functional Contracting  -  We are also concerned about the feasibility of "functional contracting." Dividing the activities that go into processing a single Medicare claim among several specialized contractors may have theoretical benefits, but the potential problems involved in coordinating all of these functions deserve careful analysis. Thorough planning, extensive pilot testing and cautious implementation will be needed to make functional contracting effective.

Funding of Medicare Contractor Operations  -  During the past decade the annual funding of Medicare contractor operations has eroded to the point where it is inadequate to meet the demands of an efficiently run, high output program.  The workload of claims to be processed has increased more than 70 percent, while the funding of contractor operations has risen less than 15 percent.  In addition, Congress has enacted literally hundreds of substantive changes in the program without providing CMS or Medicare contractors the resources for the complex processes involved in implementing them.

While contracting reform may produce some further economies of scale, they may not be sufficient to keep up with the growth in claims workload or general inflation in the economy. As the General Accounting Office has frequently pointed out, Medicare administrative costs are extremely low in comparison to similar government programs or private health insurance.

Further, in reconfiguring contractor operations, CMS will incur substantial additional transition costs. Unless the funding of contractor operations is increased by 10 percent or more it will be impossible to maintain the current levels of quality and efficiency in the ongoing processing of 900 million annual Medicare claims while, at the same time, implementing contracting reform.

CMS Capacity to Manage a FAR Contracting Environment  -  The current form of Medicare "cost-reimbursement" contracting has been in place for over three decades. It is an environment in which contractors are assigned tight annual budgets with no discretion to address shifting requirements by transferring resources among the various budget categories dictated by CMS. There is no detailed statement of work in the contracts. Instead, contractors receive hundreds of instructions from CMS, many of which are vague and subject to definition or change throughout the year. The majority of these instructions require operational changes to be carried out "within existing resources." Under the current "cost-reimbursement" business environment, all contractors have experienced situations in which CMS orders additional work to be done and then fails to make funds available to pay for it. Contractors also are frustrated by performance evaluations that judge their work on a fiscal year basis yet fail to take into account the fact that funding for new or revised work was not provided until several months after the year had begun, if it was provided at all.

Contracting in accordance with the FAR is a sound concept. However, its implementation will probably require more change by CMS itself than by its contractors.  In the FAR contracting environment, CMS will be required to negotiate a highly detailed and specific statement of work with each contractor. Any new work or significant changes in the ongoing work to be performed will have to be negotiated with each contractor and price adjustments agreed upon. Further, CMS will have to develop precise, objective measurements of contractors performance. The GAO has commented that CMS already has experience with FAR contracting under the MIP program. But that experience may not prove particularly useful in dealing with the high-output and immense scale of ongoing carrier and intermediary operations.

The immense workload imposed by hundreds of legislative changes, coupled with appropriations that have been inadequate for the work required of the agency, have greatly hampered CMS in the performance of its mission.  Under contracting reform, CMS will need to be funded, staffed and reorganized to deal with the transition to a very different contracting environment. It will need to improve its planning, funding and policy implementation processes as they affect Medicare administrative contractors. The FAR contracting process will not accommodate constantly shifting agency strategies and goals, or imprecise, untimely definitions of the work that contractors are to perform.

Contractor Liability  -  The financial risk of being a Medicare contractor is a factor that must be carefully considered by any entity interested in this business. The weighing of potential risk against potential financial reward is an important factor in making the decision to compete for Medicare administrative business. The revised standards for liability and indemnification of Medicare Administrative Contractors proposed in H.R. 2768 are inadequate for the levels of risk to which carriers and intermediaries are exposed. They would greatly increase the business risk of being a contractor. Insuring for the added risk would also increase contractors' operating costs and thus the government's cost of administering the program.

We urge that the liability and indemnification provisions of H.R. 2768 be reexamined. The liability provisions that CMS has incorporated in the contracts that it has awarded under the Medicare Integrity Program contracting authority are not appropriate for the program management work performed for Medicare by carriers and intermediaries. We believe that, when CMS moves beyond the limited projects that have been awarded thus far under MIP, it will find itself pressured by MIP contractors to adopt contract liability language comparable to that in current intermediary and carrier contracts.

Contractor Termination Costs  - Under their current contracts, carriers and intermediaries do not make a profit. They have many career employees with 20 or more years of service that must be provided severance pay if a contractor leaves the Medicare program.

At the beginning of the Medicare program, the government agreed that, under the long-term cost-reimbursement relationships envisioned, carriers and intermediaries would be entitled to recover their termination costs regardless of whether the government or a contractor decided to end the relationship. In view of this agreement, carriers and intermediaries have not been allowed to include any charge for funding termination costs as an ongoing operating cost to be reimbursed by the government. We believe that CMS intends to end this longstanding commitment when it enters into new FAR contracts with existing carriers and intermediaries. Termination costs would be allowed only if the government cancels a contract. This would be extremely unfair to existing contractors - especially so in view of the fact that, since 1965, more than 40 contractors have left the program subject to the existing termination rights.

If the Medicare program continues to contract on a cost-reimbursement or cost plus incentive fee basis, the traditional termination provisions should be retained in new contracts.  If, instead, it changes from cost-reimbursement to fixed price contracting and forces contractors to give up their traditional right to termination costs, it is critically important that the change be applied prospectively.

Unless current contractors are assured that the potential severance pay and lease termination expenses accrued up to this point will continue to be covered should they decide to leave Medicare, many may quickly drop out of the program under their existing contracts, in order not to lose their right to recover termination costs. Importantly, if the accrued termination costs of existing contractors are recognized under new contracts, the potential cost to the government will eventually disappear as the contractors' current employees leave or retire and are replaced by personnel not covered by the traditional contract language. Moving forward all bidders will simply include their prospective termination costs in the prices they bid for Medicare contracts.