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Performance and Accountability Report
Fiscal Year 2002

Appendix A - HHS FY 2002 Top Management Challenges Identified by the Office of Inspector General (OIG)

The following list of Top Management Challenges was identified by the HHS Office of Inspector General (OIG) for the fiscal year ending September 30, 2002. For each issue, the OIG has prepared a description of the challenge, and an assessment of management's progress in addressing the challenge. Those sections are followed by HHS management's brief comments.

Management Issue #1: Bioterrorism Preparedness

Management Challenge
Events of and since September 11, 2001 have underscored the need for the necessary infrastructure and tools to respond to potential future terrorist events, including bioterrorism, and other public health emergencies. The OIG's concerns center on HHS' vulnerabilities to outside threats and the readiness and capacity of responders at all levels of government to protect the public health since the Department is responsible for so much of the Nation's federal heath care resources and programs.

The OIG initiated a number of security-related reviews in FY 2002 and plans to continue security and health system preparedness studies in FY 2003. The OIG assessed security controls at the CDC and NIH campuses and is completing reviews of several FDA laboratory facilities. In addition, reviews at 11 college and university laboratories have been conducted, all of which included an assessment of the institutions' compliance with the USA Patriot Act of 2001, which requires prohibition on access to select agents by "restricted persons." Reviews at agency facilities and laboratories to date reveal substantial problems in each of the areas covered by DOJ's "Vulnerability Assessments of Federal Facilities."

The OIG is now evaluating the effectiveness of CDC's bioterrorism preparedness efforts, assessing state and local health departments' ability to detect and respond to bioterrorist events, as well as the agency's readiness for deployment of the National Pharmaceutical Stockpile. Reviews are also determining the integrity of CDC's vaccine procurement program and CDC's implementation of the regulation governing facilities that transfer and receive select agents.

Assessment of Progress in Addressing the Challenge
As a result of these completed and ongoing reviews, HHS agencies are identifying resources to implement corrective action plans addressing OIG's findings and recommendations. Federal, state, and local health departments are working cooperatively to ensure that bioterrorist attacks are detected early and responded to appropriately. As part of this effort, CDC has taken steps to increase the supply of pharmaceuticals needed in the event of chemical, biological, or radiological attacks.

Management's Comments in Brief
Before the terrorist attacks on September 11, 2001, and the subsequent anthrax attacks via the postal systems, HHS had given CDC key responsibilities to help protect our Nation from, and respond to, acts of bioterrorism. During FY 2002, CDC led the public health response to the first bioterrorism attack in U.S. history and greatly enhanced preparedness in the event of future attacks. CDC's major contributions to this effort include the following:

• Expanded the existing bioterrorism cooperative agreements to fund all states, four localities, and eight territories. All jurisdictions now receive funding for each of the key elements of bioterrorism preparedness and response, which are: preparedness planning and readiness assessment; surveillance and epidemiology laboratory capacity; communications and information technology; health risk communication and information dissemination; and education and training. The program has been centralized in CDC's Office of the Director giving projects a single, coordinated point of contact for bioterrorism preparedness.



• Awarded more than $900 million in cooperative agreements within one month of the President's signature on supplemental appropriations, giving states flexibility to spend immediately on urgent needs while developing detailed workplans.



• Increased to 150 the number of chemicals in the Rapid Toxic Screen, which in the event of a chemical emergency or chemical terrorism, would provide vital information on chemical agents. CDC also funded five state environmental health laboratories to provide additional surge capacity in the event of a major chemical terrorism incident.



• Increased to 12 the number of National Pharmaceutical Stockpile 50-ton "push packages" that contain medical and pharmaceutical materials stored in special weather-resistant cargo containers. These portable stockpiles can be rapidly deployed to a disaster site, as was demonstrated on September 11, 2001, when a push package arrived in New York City within seven hours of approved deployment. CDC has also created a number of vaccine repositories at strategic sites around the country and developed mechanisms for rapid vaccine mobilization.



• Filled more than 50 separate orders for antibiotics to carry out anthrax post-exposure prophylaxis in 11 states and the District of Columbia via the National Pharmaceutical Stockpile.



• Issued new guidelines for protecting emergency responders and for safeguarding building ventilation systems from attack, addressing self-contained breathing apparatus respirators for occupational use by emergency responders against chemical, biological, radiological, and nuclear agents.

Management Issue #2: Grant Management

Management Challenge
Departmental discretionary grants, estimated to total over $35 billion in FY 2002, must be used appropriately so as to achieve their intended purposes. Most of the departmental agencies rely on the grant mechanism as a pivotal tool in meeting their mission objectives, such as providing critical health services to underserved individuals, researching the causes and treatments of disease, elevating the social and economic status of vulnerable populations, and supporting the nationwide infrastructure for the health surveillance and prevention network. As such, it is incumbent upon HHS to award grant funds to the most worthy and competent organizations and to adequately monitor program results and use of federal funds. However, the programs are numerous and diverse. Vigilance is required to assure that specific awards are free of abuse and the monitoring systems to manage them are capable of identifying improper behavior.

To address this challenge, OIG has initiated a two-part grant management review plan. The OIG is studying several HHS OPDIV grantmaking and oversight processes to identify vulnerabilities and to assess criteria and procedures for determining grantee risk and developing and monitoring corrective action plans for high-risk grantees. At the same time, reviews are conducted to assess individual grantees' program activities and stewardship of funds. This two-part strategy is designed so that findings and recommendations derived at the agency level can be used in examinations at the grantee level and vice versa.

Assessment of Progress in Addressing the Challenge
Through the governmentwide Federal Grant Streamlining Program, the HHS grant management environment is undergoing changes. The program implements the Federal Financial Assistance Management Improvement Act of 1999, which requires agencies to improve the effectiveness and performance of their grant programs, simplify the grant application and reporting process, improve the delivery of services to the public, and increase communication among entities responsible for delivering services. As the lead agency in this multi-year initiative, HHS has worked to streamline projects since the law's enactment. Because the initiative requires grant officials to examine the way they do business, they are in a good position to focus not only on streamlining the grant process but also on ensuring that results are achieved and federal funds are used appropriately.

Management Comments in Brief
A wide variety of departmental activities are currently underway which are complementing the various OIG studies and providing a renewed focus on how departmental staff assess grantee progress in achieving grant outcomes and monitoring grantee compliance with Federal and agency specific grant requirements. Specific initiatives include the following.

• OPDIVs are continuing their efforts to establish performance goals in various grant programs by requiring applicants, as part of their grant application proposals, to identify performance targets to be achieved by the end of each budget period. OPDIVs review grantee progress reports to assess achievement of performance targets and, if deemed necessary, more intensive monitoring and/or technical assistance may be provided to assist grantees in accomplishing identified outcome(s).



• Targeted reviews of specific grant operations within the Department are currently underway or being planned under the aegis of the Assistant Secretary for Administration and Management. These reviews, building on previously developed grants management systems review protocols, examine a variety of pre-award and post-award activities performed by an HHS awarding agency. For example, a review of the Administration for Developmental Disabilities (ADD), a program within the Administration for Children and Families (ACF), was conducted in FY 2002 to ascertain whether ADD grant practices are in compliance with established departmental regulations and policies; evaluate pre-award processes, including a determination as to whether the award process effectively maximizes competition; and examine post-award monitoring activities, including performance and financial report submissions and site-visits. A similar review is underway encompassing ACF's Administration for Native Americans.



• HHS' Grants Management Balanced Scorecard is a self-administered review protocol enabling OPDIVs to assess perceptions of performance by soliciting feedback from a variety of internal and external users/customers. The results provide indicators as to how well an OPDIV is performing a variety of pre-award and post-award grant award activities enabling OPDIVs to develop and implement action plans to address areas targeted for improvement. To date, all OPDIVs have administered both phases of the Balanced Scorecard (Phase 1 consisting of internal OPDIV surveys; Phase 2 external surveys of grant recipients). OPDIVs are at varying stages in reviewing Scorecard data results, developing action plans to implement process improvements and re-administering the Scorecards. OPDIVs such as HRSA, AHRQ and AoA, for example, have developed and implemented initial process improvements and will measure their success in future administrations of the Scorecard.



• Special award conditions of a programmatic and/or administrative nature may be appropriate if an organization has a history of poor programmatic performance, is financially unstable, has inadequate management systems, or has not complied with the terms of previous HHS awards. If special conditions are included in an award, the awarding office is required to designate the grantee as "high risk/special award conditions". In order to notify all HHS awarding offices of entities considered "high risk/special award conditions" by one or more awarding offices and/or those for which the Office of Inspector General (OIG) has issued an alert, HHS maintains the departmental Alert List. If an award contains special conditions, the OPDIVs must ensure that the grantee is aware of those conditions and understands the action that is necessary to satisfy them. Furthermore, OPDIVs develop a corrective action plan with the affected grantee, monitor improvement, and assess, at the conclusion of the corrective action period (generally no more than two years), whether the special award conditions can be removed. SAMHSA has been especially diligent in placing appropriate organizations on the Alert List in a timely manner, monitoring progress with corrective action plans, and removing them from the Alert List once the corrective actions have been satisfactorily addressed.



• Through the governmentwide Federal Grant Streamlining Program (FGSP), the HHS grant management environment is undergoing changes. The FGSP is a government-wide effort required by Public Law 106-107, the Federal Financial Assistance Management Improvement Act of 1999, which requires all federal agencies to improve the effectiveness and performance of their grant programs, simplify the grant application and reporting process, improve the delivery of services to the public, and increase communication among entities responsible for delivering services. As the lead agency in this multi-year initiative, HHS continues to provide both strategic oversight for the act's implementation as well as a leadership role in the various streamlining and simplification workgroups created under the FGSP. Achievements to date include, but are not limited to, the establishment of the e-Grants Office within HHS which collaborates with multiple federal agencies to help realize the requirements for electronic access to funding opportunities and submission of applications electronically; participation in the development and issuance of several Federal Register notices soliciting public comment on key initiatives encompassed under the act; e.g., proposals for simplifying and clarifying the various governmentwide cost principles applicable to grant programs; and increased development and use by OPDIVs of electronic technologies to ensure the ability to receive and process applications electronically as well as required reports under grant awards.
  
  The National Institutes of Health (NIH), which continues to actively represent the Department's research programs in the interagency forums, was one of the original participants in developing the concept and planning for the e-Grants portal, which built on the NIH Commons concept. NIH also was an active partner in the development of the Transaction Set 194, which is serving as the starting point for the core data set for applications to be submitted through the e-Grants portal. In addition, NIH is developing a web-based system that will provide easier grantee access and a friendlier user-interface for submission of Financial Status Report data to replace its current electronic system. The OPDIVs are also making greater use of fillable forms and electronic processing of grant applications. While most of this activity is directed at discretionary grants, SAMHSA is using an automated block grant application system, which it plans to convert to an interactive system.
  
  Because these initiatives require grant officials to examine the way they do business, they are in a good position to focus not only on streamlining the grant process but also on ensuring that results are achieved and federal funds are used appropriately.
  
  
• As one of several initiatives designed to ensure that the Department meets the President's Management Agenda for improving the management and performance of the Federal government, the Office of Grants Management, within the Office of the Assistant Secretary for Administration and Management, was authorized by the Secretary to conduct a departmental review of grants management activities involving the pre-award process. Special interest was given to the development of funding announcements in order to develop best practices, afford greater efficiencies and increased accountability, and ensure that announcements are consistent with regulations and departmental policies. The departmental review has identified various recommendations for improvements in announcement preparation and presentation which have subsequently been promulgated through a directed action transmittal to the awarding components. All OPDIVs are making strides at integrating best practices into the development of their announcements resulting in greater consistency across the Department.

Management Issue #3: Payment for Prescription Drugs

Management Challenge
Because prescription drugs are such a significant part of 21st century medical care to help ensure proper treatment and maximum wellness, it is important that Medicare and Medicaid beneficiaries' access to pharmaceuticals is not hindered by overpricing. Overall, in calendar year 2001, Medicare Part B spent over $6.5 billion for prescription drugs. Similarly, in 2001, the federal share of dollars spent for Medicaid prescription drugs was nearly $14.3 billion.

The OIG has consistently found that Medicare pays too much for prescription drugs - more than most other payers. For example, Medicare payments for 24 leading drugs in 2000 were $887 million higher than actual wholesale prices available to physicians and suppliers and $1.9 billion higher than prices available through the Federal Supply Schedule. This has occurred because the reimbursement methodology is fundamentally flawed.

By law, Medicare's payment is equal to 95 percent of a drug's average wholesale price (AWP). However, the AWPs are not really wholesale prices; for the most part, they are reported by manufacturers to companies that publish drug pricing data. As OIG reports have indicated, the published AWPs that Medicare uses to establish drug prices bear little or no resemblance to actual wholesale prices available to physicians, suppliers, and large government purchasers. Further, because physicians and suppliers keep the difference between the actual price they pay for a drug and 95 percent of its AWP, they have a financial incentive to buy from a drug company with artificially inflated AWPs. Some may argue that the high drug payments are offset by insufficient Medicare payments to administer the drugs.

Several OIG reports indicate that Medicaid is also paying too much for prescription drugs because state reimbursement methodologies are based on inflated AWPs. States should change their reimbursement methodologies to reflect the drug pricing categories, i.e., single-source innovator drugs, multiple-source innovator drugs not covered by the Federal Upper Limits, multiple-source noninnovator drugs not covered by the Federal Upper Limits, and drugs on the Federal Upper Limit schedules. Also, a connection is needed between how Medicaid pays for drugs and how rebates are calculated. Currently, any increases in pricing would not represent a corresponding increase in rebates; in fact, Medicaid could be paying more for drugs while getting less in rebates.

In recent large settlements, two pharmaceutical manufacturers allegedly set and reported some AWPs at levels far higher than the actual acquisition cost paid by the majority of their customers and caused those customers to receive excess Medicare and/or Medicaid reimbursement. To resolve their liability for this and other conduct, TAP Pharmaceuticals and the Bayer Corporation agreed to pay $875 million and $14 million, respectively, to federal health care programs.

Assessment of Progress in Addressing the Challenge
Despite attempts by CMS to work with the Congress to develop and implement more realistic Medicare and Medicaid reimbursement methods for prescription drugs, OIG reports continue to show that these flawed payment methodologies remain essentially unchanged. As of this writing, legislative progress is being made but a consensus bill has yet to be passed. However, the Benefits Improvement and Protection Act (BIPA) of 2000 gave the Secretary authority to make some administrative adjustments to the payment methodology in Medicare.

Management's Comments in Brief

The CMS continues to collect and analyze data on drug pricing and the costs of physicians administering drugs. For example, it is studying non-Medicare drug pricing of selected drugs covered under Part B to determine the feasibility of other approaches to more accurately determine AWP. In addition, the CMS has begun to utilize a single contractor to determine payment rates to eliminate the current variation in contractor prices.

Management Issue #4: Protection of Critical Systems and Infrastructure

Management Challenge
To accomplish its major missions of providing health care to the elderly, the disabled, and the poor; facilitating research; preventing and controlling disease; and serving families and children, the Department must rely on a distributed and open computing environment for information processing, knowledge sharing, and collaboration. Management, therefore, must ensure the creation of an integrated process to establish security policies for information technology and monitor compliance; this process is essential for an effective IT security program.

Through Presidential Decision Directive 63 and the Government Information Security Reform Act (GISRA), the Federal government has been mandated to assess the controls in place to protect assets critical to the nation's well-being and report on their vulnerability. The events of September 11, 2001 greatly heightened the importance of protecting physical and cyber-based systems essential to the minimum operations of the economy and the government. Due to its major responsibilities for public health and safety, the Department has been identified as a Tier I agency, signifying a dramatic negative national impact should HHS systems be compromised.

Assessment of Progress in Addressing the Challenge
HHS has made much progress in securing the most critical of essential assets. Core requirements for security controls were established and distributed, and systems architecture documents are being developed. However, recent OIG assessments (CFO and GISRA) found numerous information systems general control weaknesses in entity-wide security, access controls, service continuity, and segregation of duties. A collective assessment of deficiencies in Medicare systems resulted in the reporting of a material weakness in the FY 2001 HHS financial statement audit. While OIG has not found any evidence that these weaknesses have been exploited, they leave the department vulnerable to: 1) unauthorized access to and disclosure of sensitive information; 2) malicious changes that could interrupt data processing or destroy data files; 3) improper payments; or 4) disruption of critical operations.

Management's Comments in Brief

Under Secretary Thompson's leadership, HHS is addressing Information Technology (IT) Security as one of its top management priorities. IT security is a prominent part of the HHS Enterprise Information Technology Strategic Plan, which established an enterprise approach to project planning and implementation for critical infrastructure services in HHS. Based on plan priorities, contracts were awarded in FY 2002: to install multi-tier virus protection across HHS; to implement vulnerability scans of critical HHS systems; and to provide perimeter protection for all Internet access points. For FY 2003, contracts are in place to establish round-the-clock monitoring of security alerts; to provide certification and accreditation for all Critical Infrastructure Protection assets; reduce GISRA corrective action items and continue the Project Matrix process through the implementation of a Phase 2 Analyses of Critical Assets. Security, like other infrastructure issues, has received enhanced emphasis since the events of September 11, 2001. HHS is encouraged that the OIG has found no evidence that any security weaknesses have been exploited. To further strengthen our security posture, HHS has continued the emphasis placed on functional areas such as the CMS Medicare, CDC Bioterrorism, NIH Computing Center, FDA Product Tracking, and other OPDIV operations through implementation of a comprehensive systems security program. The program features initiatives in four fundamental areas: security policy; training and awareness; engineering; and oversight. Such a coordinated investment facilitates both remedial corrections and improved preventative measures across all of the Department's activities. The HHS CIO and CIO Council will continue to provide departmental oversight of the Security Program to insure that all HHS security and privacy requirements are efficiently and effectively met.

HHS also addressed the issue of physical security during FY 2002. For example, FDA:

• Increased physical security and provided increased guard services at FDA facilities;



• Improved security systems at FDA laboratories and offices;



• Installed physical barriers at the entrances to FDA's buildings and parking lots;



• Purchased secure storage for select agents, including lockable storage cabinets, refrigerators and freezers to prevent unauthorized use or theft; and



• Developed a continuity of operations plan.

Along the same lines, CDC:

• Increased security guard force and armed guards;



• Restricted entry points to laboratories and buildings;



• Instituted random car searches and routine inspections of all delivery vehicles;



• Conducted building evacuation drills and established accountability procedures;



• Upgraded emergency notification systems; and



• Increased the use of lighting, closed circuit TV cameras, and check points.

Additionally, NIH convened three groups with interlocked membership to manage security planning, policy, and operations. Under the active leadership of the NIH Acting Director, a NIH Security Task Force was assembled. This Security Task Force ratifies overall agency security policy and planning and is the liaison with other federal and state entities on security policy and response. Members of NIH organizations involved in actually delivering security provide staff support to the Task Force.

NIH security procedures and access control to NIH facilities vary in response to the perceived level of risk and in accordance with direction from the Executive Office, Congress, and local law enforcement.

Other NIH security measures include the following:

• Cars are challenged at all perimeter access points onto the NIH campus. Visitor cars and service vehicles are inspected for contraband. Vehicles with valid NIH parking permits driven by staff with valid NIH IDs are waved through perimeter checkpoints. However, these vehicles may be subject to random inspections by NIH security.



• NIH police and uniformed contract inspectors are engaged in securing the perimeter.



• Entrance to NIH buildings is either via proximity cards or a security guard checkpoint. In buildings with security guards, visitors must show a valid photo ID and sign in/out. At facilities with many outside visitors, security personnel screen or search bags and use metal detectors. NIH also conducts surveillance at loading docks.

Management Issue #5: Nursing Facilities

Management Challenge
Given the vulnerability of nursing home facility residents, it is imperative that appropriate and quality care be a top priority for all involved care providers. At the same time, payments need to be made accurately both to ensure financial stability for nursing homes and to protect the financial integrity of the Medicare program.

Financial controls and quality of care provided in nursing homes continue to be a focus of the OIG. In looking at nursing home resident assessments, OIG found differences between the minimum data set and the rest of the medical record, some of which may affect care planning. The OIG now has a number of additional studies underway. These include evaluations of the role of the nursing home medical director, quality assurance committees, nurse aid training, trends in survey and certification deficiencies, consistency and reliability of the certification process, identifying repeat offenders in the certification process, social work services, and complaints to long-term-care ombudsmen. The results of these studies will be published over the coming year.

With respect to payments, OIG found that some services were paid for twice - once to the facility under the prospective payment system and again to the supplier. The OIG also examined the medical necessity of Part B therapy provided in nursing homes, both underutilization and overutilization, and found that 24 percent of the total allowed amount of this therapy in 1999 was paid in error. In addition, over one-third of Medicare Part B payments for psychiatric services in nursing homes were inappropriate.

Assessment of Progress in Addressing the Challenge
The CMS has made progress in Part A nursing home reforms, which are important to controlling fraud and abuse. The CMS issued a fraud alert addressing the prevalent types of errors found in OIG's initial review of services that were paid under the prospective payment system and again to the suppliers. Additionally, OIG recommended recovery of the improper payments and that CMS establish payment edits in its Common Working File (CWF) and the Medicare contractors' claims processing systems to ensure that outside providers and suppliers comply with the consolidated billing provision.

The CMS agreed with the recommendations and indicated that meaningful progress had been made toward implementing edits to identify potentially inappropriate payments and recover overpayments made in connection with services that were paid for under the prospective payment system and again to the supplier. In addition, CMS issued a task order to one of its payment safeguard contractors to identify overpayments in three States. The OIG is continuing work in this area to determine if overpayments persist.

CMS rolled out a nationwide nursing home quality initiative in Fall 2002 which made public facility-specific information regarding the quality of care in nursing homes to benefit those who are looking for a facility that can best provide needed care for a family member. This is an expansion of an earlier six-state pilot undertaken by CMS.

Management's Comments in Brief
The CMS concurs with OIG's assessment. The CMS has made significant gains in assuring that services being paid under the skilled nursing facility prospective payment system (SNF PPS) by fiscal intermediaries are not also billed to and paid by carriers. In April 2002, CMS implemented CWF edits that will detect and deny cases in which carriers are being billed for services that the CWF shows to be in a Medicare covered Part A stay during the period in which the supplier billed the carrier for the service. In July 2002, CMS also implemented edits that will detect and mark payments that were made by carriers for persons in the course of a Medicare covered SNF stay where the SNF claim did not post to the CWF record before the carrier claim was paid, thus resulting in an incorrect payment. In January 2003, CMS plans to implement CWF edits that will detect similar incorrect cases in the fiscal intermediary claims processing system.

In addition, CMS has developed a Web site application that can be used by a physician, practitioner or supplier to determine if a service at the Common Procedure Coding System level should be billed to the SNF (because it is bundled under SNF PPS) or to the carrier (because it is separately payable).

We believe that enforcement of longstanding policy through the CWF edits, combined with ongoing provider education efforts, will greatly reduce the problems created by failure of suppliers to seek payment from SNF for services for which the SNF is being paid as part of SNF PPS.

Finally, CMS has made significant strides in its oversight of the SNF PPS through a program safeguard contract that examines the minimum data set 2.0 resident assessment data, including some on-sight reviews at nursing homes.

Management Issue #6: Medicaid Payment Systems

Management Challenge
Accuracy in the federal share of Medicaid costs is important to help ensure fairness across all state Medicaid programs as well as assure these federal health care dollars reach and achieve their maximum intended health care purposes. The OIG found that some states inappropriately inflated the federal share of Medicaid by billions of dollars by requiring public providers to return Medicaid payments to the state governments through intergovernmental transfers. Once the payments were returned, the states used the funds for other purposes, some of which were unrelated to Medicaid. Although this abusive practice could potentially occur with any type of Medicaid payment to public facilities, OIG identified this practice in two types of payments: 1) Medicaid enhanced payments available under upper payment limits (UPL); and 2) Medicaid disproportionate share hospital (DSH) payments.

Assessment of Progress in Addressing the Challenge
To curb abuses and ensure that state Medicaid payment systems promote economy and efficiency, CMS issued final rules, effective March 13, 2001 and May 14, 2002, which modified upper payment limit regulations in accordance with the BIPA of 2000. The regulatory action created three aggregate upper payment limits�one each for private, state, and non-state government-operated facilities. The new regulations will be gradually phased in and become fully effective on October 1, 2008. The CMS projected that these revisions would save $90 billion in federal Medicaid funds over the next ten years.

The OIG commends CMS for changing the upper payment limit regulations. However, when fully implemented, these changes will only limit, not eliminate, the amount of state financial manipulation of the Medicaid program because the regulations do not require that the targeted facilities retain the enhanced funds to provide medical services to Medicaid beneficiaries. The OIG also believes that the transition periods included in the regulations are longer than needed for states to adjust their financial operations.

The CMS intends to develop regulations that will outline accountability standards that states must address when making DSH expenditures. The OIG is continuing audit work on Medicaid DSH payments and will recommend program improvements once the work is completed.

Management's Comments in Brief
The CMS and the OIG have worked closely on analyzing the effects of the upper payment limit issue and regulations, and plan to continue this effort. We note that CMS has limited control over the length of the transition periods. The two- and five-year transition periods were adopted pursuant to notice and comment rulemaking. The BIPA further extended the transition periods by mandating the eight-year transition period.

Management Issue #7: Accuracy of Medicare Fee-for-Service Payments

Management Challenge
To help ensure the financial integrity of the Medicare program, continued access to Medicare benefits, as well as the long-term viability of the Medicare trust fund, it continues to be essential that documented and accurate bills are submitted for correct payment for properly rendered health care services. Based on a statistical sample, OIG estimated that improper Medicare benefit payments made during FY 2001 totaled $12.1 billion, or about 6.3 percent of the $191.8 billion in processed fee-for-service payments reported by CMS. These improper payments, as in past years, could range from reimbursement for services provided but inadequately documented to inadvertent mistakes to outright fraud and abuse. When these claims were submitted for payment to Medicare contractors, they contained no visible errors. The overwhelming majority (97 percent) of the improper payments were detected though medical record reviews. While the OIG's six-year analysis indicates continuing progress in reducing improper payments, unsupported and medically unnecessary services remain pervasive problems.

In addition to determining the overall Medicare error rate, we have conducted targeted audits and inspections to identify improper payments and problem areas in specific parts of the program. These reviews have included analyzing duplicate payments for the same service, payments made on behalf of deceased beneficiaries, and payments made for incarcerated beneficiaries. We have also determined payment error rates for specific supplies and services. For example, in a study of Medicare payments for orthotics, we found that 30 percent of orthotic claims in 1998 were inappropriately coded and therefore should not have been paid. We also found that in 1997, orders for 25 percent of sampled claims for blood glucose test strips failed to establish beneficiaries' eligibility for the supplies. Additionally, in a review of 1998 home health services, we found an improper payment rate of 19 percent. Another review found that 24 percent of the total allowed amount of Part B therapy in 1999 was paid in error. Finally, we found that 27 percent of Part B mental health services provided in nursing homes in 1999 were unnecessary and lacked any psychiatric documentation. We will continue these targeted reviews to ensure that Medicare payments are made in accordance with program rules.

Assessment of Progress in Addressing the Challenge
The FY 2001 error rate is less than half of the 13.8 percent reported for FY 1996. We believe that since we developed the first error rate, CMS has demonstrated continued vigilance in monitoring the error rate and developing appropriate corrective action plans. In addition, due to CMS' work with the provider community to clarify reimbursement rules and to impress upon health care providers the importance of fully documented services, the overwhelming majority of health care providers follow Medicare reimbursement rules and bill correctly.

In FY 2003, CMS will fully implement its Comprehensive Error Rate Testing (CERT) program to produce a Medicare fee-for-service error rate. CMS intends to run the CERT program in parallel with OIG's CFO audit for at least one year. After that time, OIG will continue to oversee this effort. The OIG will also continue targeted reviews of specific benefits where vulnerabilities have been identified to determine inappropriate payments in these areas.

Management's Comments in Brief
The CMS concurs with the OIG's assessment. In FY 1996, the OIG began estimating the national Medicare fee-for-service paid claims error rate. By FY 2000, the error rate was cut in half due in part to CMS' corrective actions which enhanced internal pre- and post-payment controls; targeted vulnerable program areas; and educated providers regarding documentation guidelines and common billing errors.

Since the OIG's error rate measure is valid only at the national level, CMS has been developing a new, more precise measure for use in the future. In May 2000, CMS awarded a Program Safeguard Contractor contract to implement the CERT program. The CERT program will produce national, contractor specific, and benefit category specific fee-for-service paid claims error rates. The CERT program began to be phased in starting in FY 2001. All contractors will be included in the CERT process by the end of FY 2002. The CMS is scheduled to replace the OIG fee-for-service error rate with CERT in FY 2003.

Management Issue #8: Medicare Contractors

Management Challenge
Because of the crucial role Medicare contractors play in helping facilitate efficient and effective health care delivery to 39.5 million Medicare beneficiaries, it is important that they be held accountable for their role in the health care financing and delivery system. For several years, OIG has been concerned about Medicare contractors' financial management problems, such as accounts receivable documentation inadequacies and the lack of integrated dual-entry accounting systems; information systems control weaknesses; integrity issues; and weaknesses in the way they assign and maintain provider numbers so as to better safeguard the program and its funds. These failures could contribute to loss of program funds; improper payments; and manipulation, fraud, and abuse.

Contractor integrity continues to be an issue, and the potential for fraud exists. Since 1993, there have been 15 separate settlements or agreements (criminal and civil) involving Medicare contractors, resulting in over $400 million in HHS recoveries for alleged improper operations. In the last year alone, the OIG has identified contractor integrity problems which include a contractor who agreed to pay $76 million to settle allegations of misconduct while acting as a Medicare Part B carrier between 1966 and 1998. Among other things, the contractor had failed to process claims properly, then submitted false information to CMS regarding the accuracy and timeliness with which it handled those claims. In addition, a former Medicare fiscal intermediary agreed to pay $9.3 million to resolve its potential liability under the False Claims Act and Civil Monetary Penalties Law for allegedly falsifying data regarding its performance on Medicare cost reports.

Assessment of Progress in Addressing the Challenge
The OIG expressed an unqualified opinion on the CMS FY 1999 through FY 2001 financial statements largely because CMS continued to contract for validation and documentation of accounts receivable. However, once again OIG's FY 2001 financial statement audit disclosed that the lack of a fully integrated financial management system continued to impair the reporting of accurate financial information. To address these problems, CMS has initiated steps to implement the Healthcare Integrated General Ledger Accounting System (HIGLAS), expected to be fully operational at the end of FY 2007.

The FY 2001 reviews of information systems controls also disclosed numerous and continuing weaknesses at Medicare contractors, as well as application control weaknesses in contractors' shared systems. These vulnerabilities do not effectively prevent unauthorized access, malicious changes, improper Medicare payments, or critical operation disruptions. Corrective action is needed to address the fundamental causes of control weaknesses.

Management's Comments in Brief
The CMS concurs with the OIG's assessment and has been constantly striving to improve Medicare contractor financial management weaknesses. The CMS has made significant improvements in this area over the last few years as evident by the unqualified opinions on the CMS fiscal years 1999, 2000, 2001, and 2002 financial statements. The CMS long term solution for addressing many of these issues is the HIGLAS.

CMS procured a systems integrator to implement HIGLAS and have initiated implementation of an approved Joint Financial Management Improvement Program commercial off-the-shelf product at two Medicare contractor pilot sites. CMS also continues to validate the Medicare contractors' financial reporting by contracting with certified public accounting firms to conduct Statement of Auditing Standards (SAS) 70 internal control reviews and accounts receivable consulting reviews. The SAS 70 reviews concentrate on the functional areas of Electronic Data Processing (EDP) claims processing, financial management, and debt collection. The accounts receivable reviews ascertain the accuracy and completeness of the accounts receivable activity. Until HIGLAS is fully implemented, CMS will continue to rely on these ongoing activities aimed at compensating for the lack of a modernized system. The CMS has also continued to revise and clarify financial reporting and debt collection policies and procedures based on various audit and review findings.

Our comprehensive systems security program includes the operations of our Medicare fee-for-service contractors. A key feature of the program for the Medicare contractors was the development and dissemination of codified core security requirements (CSR). During FY 2002, CMS received each Medicare contractor's second annual assessment of their compliance against the CSR. Along with an independent contractor, CMS is completing its final evaluation of each Medicare contractor submission. The CMS requested, received, and distributed $9.7 million in additional FY 2002 funding for proposed safeguards and corrective actions. These safeguards and actions will be implemented throughout FY 2003. The CMS will continue to fund needed safeguards in future years, to the extent of available resources.

Other Issues Identified in FY 2001 Not Cited by OIG in FY 2002

Medicare Managed Care
The CMS is gratified to see that Medicare managed care no longer appears on the OIG's list of top HHS management challenges. The streamlined marketing review process instituted in FY 2002 was successful and therefore was again used for the FY 2003 renewal season. The CMS has also completely revised the 2003 model Evidence of Coverage based on consumer testing and beneficiary advocacy and managed care industry input.

Oversight of Prospective Payment System (PPS) Implementation
The CMS is gratified to see that oversight of PPS implementation no longer appears on the OIG's list of top HHS management challenges. The CMS' ongoing research to improve and refine the home health, skilled nursing facilities, and inpatient rehabilitation facilities prospective payment systems will ensure continued appropriate payments and beneficiary access to care.

Medicare Mental Health Services
The CMS is gratified to see that Medicare mental health services no longer appears on the OIG's list of top HHS management challenges. The CMS concluded the partial hospitalization and psychiatric outpatient services intensive education pilot program. During the course of the pilot, the claims processing contractor had face-to-face interactions with 42 providers and conducted two teleconferences with providers unable to attend the face-to-face training. A clinician conducted training that was comprised of a detailed walk-through of all relevant Medicare billing and coverage guidelines. In addition, participants were provided with a manual containing all the information for their reference.

Post-training evaluations revealed that the intensive education pilot program was extremely successful. The CMS reviewed partial hospitalization and psychiatric outpatient claims after the training and found a significant drop in denial rate. For example, one state's denial rate was reduced from 90 percent to 17 percent. In another state, the denial rate dropped from 80 percent to 23 percent. Overall, providers were very satisfied with the training, and felt that their questions were answered.

The pilot program validates the importance of CMS' recent efforts to interact with the provider community through education. The training provided a great opportunity for working partnerships to develop between CMS and providers allowing for increased communication and increased appropriate payments of Medicare benefits.

Child Support Enforcement
The Office of Child Support Enforcement (OCSE), an office within ACF, is gratified to see that child support enforcement was removed from this year's list. OCSE continues to operate Project Save Our Children (PSOC) screening units throughout the country. PSOC is now fully operational nationwide. The volume of cases processed by the screening units is expected to increase significantly this year. Outreach efforts to states and the local law enforcement community will continue to reinforce existing relationships and forge new ones in the newly expanded areas. Our ongoing training partnership with staff from the DOJ, the U.S. Attorney's Office, state agencies, and the HHS OIG, while shifting this year from a centralized approach at the DOJ National Advocacy Center to a more local level collaboration, will continue to be supported by all parties.

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