Mr. Chairman and members of the Subcommittee, thank you for the opportunity to testify on behalf of the Department of Health and Human Services (HHS) concerning our implementation of the Debt Collection Improvement Act of 1996 (DCIA). We have made a great deal of progress, yet we face some unusual challenges due to the structure of some of our largest programs.

HHS is a unique Federal agency, responsible for the health and well being of all Americans. Our programs and operating systems are grounded in the principles of taking care of our citizens first and foremost while remaining accountable to the taxpayer to recover monies due to the Federal government.

General. As the custodians of nearly $400 billion in outlays annually, HHS has instituted a policy of aggressively pursuing debts owed. It is key to our overall financial management philosophy to ensure the public�s monies are spent only for their intended purposes. Our policies have helped us to record steadily increasing debt collections, from $10.1 billion in FY 1996 to $15.3 billion in FY 2000, with more than $10.1 billion recovered as of June of this year.

Child Support Enforcement Program. HHS has been in the forefront of the challenge to ensure that children receive the financial support they deserve from non-custodial parents. The Child Support Enforcement program is a very successful Federal/State partnership effort aimed at fostering family responsibility and promoting self-sufficiency by ensuring that children are supported financially and emotionally by both parents. Among the program's enforcement tools is the Federal Tax Refund Offset Program. Under this program, tax refunds owed to non-custodial parents are intercepted and sent to State child support agencies to pay the non-custodial parent�s past-due child support debts. Since the program began in 1982, more than $13 billion in past-due child support has been collected and more than 16 million tax refunds have been intercepted. In 2001, tax refund offset, collections for the child support program have exceeded $1.5 billion�a new record we are very proud of.

HHS and Treasury continue to work closely together to increase the number of States participating in the Administrative Offset Program which offsets Federal payments other than tax refunds. While the Federal Tax Refund Offset remedy is mandatory, and must be used by State child support enforcement agencies, the Administrative Offset Program is an optional enforcement remedy that is based on the Debt Collection Improvement Act (DCIA) of 1996. Thirty-six (36) States are participating in the Administrative Offset Program and, more than $5 million has been collected in the last four years.

The Secretary and I are committed to maintaining strong program management and we believe a critical component is sound financial management. The following HHS profile will help explain our performance and lay the groundwork to discuss the difficult issues we face in managing our receivables.

HHS accounts for approximately four percent of all monies owed to the Federal government; this amounted to over $10.0 billion last year. Nearly all this amount was made up of monies due from health insurance companies, hospitals and other health care providers. Loans account for only six percent of the $10 billion and make up a very small part of the HHS portfolio.

HHS has 13 percent of the government-wide delinquent receivables over 180 days. We are well aware that collections must be made early in the process. The older a receivable becomes, the less likely we are to collect it. However, excluding the health care debts, our delinquent receivables are only two percent of the government wide delinquent receivables over 180 days. Our most difficult area to manage is the Medicare Secondary Payer (MSP) debt. This debt occurs when another entity should have been the primary payer, but Medicare paid in error or paid conditionally. The bulk of this debt involves insurers, employers, and third parties. The program has no ongoing payment relationship with these entities that would allow us to collect more money through internal administrative offset programs. Consequently, we have a lower collection rate for this type of debt.

Further complicating the situation, Medicare program activity and the decentralized debt collection function is spread across central office components, 10 regional offices, and the Medicare contractors, each of which uses multiple systems for tracking and reporting Medicare debt. Systems used by the Medicare contractors have not always produced adequately supported data making it difficult for our auditors to validate the balances. As a result, it is extremely difficult to ensure debt collection policy is adhered to consistently by all parties. Also, lack of consistent procedures for the Medicare contractors and regional offices has hindered Centers for Medicare and Medicaid Services (CMS) efforts to collect and refer debt as effectively and efficiently as possible.

The Secretary and I are committed to addressing these challenges and to modernizing Medicare�s financial systems in order to strengthen the management of accounts receivable and allow more timely and effective collection activities on outstanding debts.

Centers for Medicare and Medicaid Services (CMS). Our largest agency, the Centers for Medicare and Medicaid Services, accounts for 85 percent of the Department�s receivables. CMS understands that its auditors and the General Accounting Office (GAO) continue to raise legitimate concerns regarding CMS�s contractors� financial reporting, particularly the status of the contractors� accounts receivable. In large part, these concerns can be attributed to the design of the financial management system of the Medicare program, which relies on outdated single-entry accounting systems. Secretary Thompson, Administrator Scully, and I are committed to modernizing Medicare�s financial systems to increase the efficiency and accuracy of the financial reporting in accordance with standard government accounting practices. CMS is moving to implement a new integrated accounting system that will meet all federal information technology and financial management requirements, including the financial activities of its claims processing contractors.

CMS acknowledges and appreciates that GAO recognized three weaknesses in the Agency's financial management, in which the GAO studied CMS's debt collection efforts. These included outdated accounting and information systems, the speed of CMS's referral of Medicare Secondary Payer (MSP) debt, and CMS's monitoring of contractor debt referral as required by DCIA. We, too, identified these issues, and have already taken a number of aggressive steps to address these concerns.

Improving CMS�s Accounting Systems. Since the beginning of Secretary Thompson's service here, when he learned just how old and outdated Medicare's accounting systems are, he has made modernizing them a priority. CMS currently lacks a dual entry financial management system that fully integrates the Agency's accounting systems with those of its Medicare contractors. In order to improve Medicare�s fiscal accountability to beneficiaries and taxpayers, we recently announced a long-term project to combine Medicare�s many outdated accounting systems into a single, unified system that will better ensure that the program pays correctly and enhances the management of debt. Independent studies conducted by the GAO as well as HHS�s Office of Inspector General revealed weaknesses in how fiscal intermediaries and carriers account for Medicare benefits. CMS evaluated these weaknesses and has purchased a commercial off-the-shelf financial accounting system for use by both Medicare contractors and CMS administrative accounting functions.

The Healthcare Integrated General Ledger Accounting System (HIGLAS) will pilot the new accounting approach at two Medicare contractors and, if it is successful CMS will eventually replace the remaining 51 different accounting systems now in use by the private insurance companies. Medicare contractors process and pay nearly 3 million claims every day. The pilot project will integrate the new system with Medicare�s three standard claims processing systems and replace the current CMS administrative accounting system with a modern, web-based accounting system. Most Medicare contractors do not use double entry accounting methods or have general ledger capabilities. As a result, accuracy of reported activities must be verified manually. Despite these weaknesses, CMS has maintained clean audit opinions in recent years.

To assist CMS in implementing the new accounting system, the agency has contracted with a systems integrator to implement a Joint Financial Management Improvement Program certified financial system. The project will be implemented in phases during the next five years, ultimately creating a seamless modern accounting system for Medicare. The pilot contractors will thoroughly test the system functions before a final decision is made to install the accounting system in other Medicare contractors. In addition, CMS will stress test the system to ensure it works correctly and can handle the large volume of financial transactions generated by the Medicare program. Full implementation is projected for the end of FY 2006. HIGLAS will help CMS achieve its goal of protecting Medicare, the trust funds, and the American taxpayers.

Referring CMS�s Uncollected Debt Appropriately. CMS has two main types of debt: Medicare Secondary Payer (MSP) debt and non-MSP debt. The debt collection procedures used by CMS vary based on the type of debt and are closely tied to the relationship CMS has with the debtor. For example, the vast majority of non-MSP debts are provider, physician, or supplier debt. In these instances, CMS typically has ongoing relationships with the debtors and may recoup the overpayment or debt directly from the provider, physician, or supplier by offsetting their future Medicare payments.

On the other hand, MSP debt, as mentioned previously, is comprised of claims that CMS paid initially, and then subsequently determined that Medicare should have been the secondary rather than the primary payer. MSP debt is not as easily recouped as non-MSP debt, since MSP debt involves debtors with whom Medicare does not have an ongoing claims payment relationship. These debtors are typically insurers, employers, and third party administrators.

For both MSP and non-MSP debts, once they become 180 days delinquent, CMS is required to refer these amounts to the Treasury Offset Program (TOP) and to a designated Debt Collection Center (DCC) in order to pursue repayment. The Department of Health and Human Services' Program Support Center (PSC) serves as the DCC for all of CMS�s MSP debts and a portion of non-MSP debts.

CMS has taken aggressive action to address concerns with its debt referral processes. For example, in 2000, CMS implemented accelerated debt referral pilot projects for non-MSP debt and MSP debt at selected Medicare contractors with the help of CMS regional offices. The pilot projects initially focused on the area with the greatest dollars at risk -- the collection of Medicare Part A related debts -- and required contractors to send customized demand letters to the delinquent debtors and input the debt information into the Agency�s Debt Collection System. This allowed for appropriate electronic debt referral to the PSC and Treasury. As a result of the pilots, the Agency referred nearly $2 billion in total delinquent debt by the end of FY 2000 and exceeded the Agency�s referral goal of 25 percent of all eligible debt by $500 million. Due to the overwhelming success of the pilot projects, CMS made them a permanent requirement for all contractors.

Since 1999, CMS has hired independent certified public accountants (CPAs) to review Medicare contractor accounts receivable balances and validate the receivable amounts reported to CMS. These reviews helped the Agency ensure that its contractors' debts were accurately reported. The CPAs conducted reviews at 14 Medicare contractors last year, which comprised about 68 percent of the accounts receivable balance reflected in CMS 2000 financial statements. The CPAs' reviews uncovered a total of $201 million in MSP and $174 million in non-MSP errors resulting in accounts receivable being overstated by $374 million, out of a total of $4.5 billion. The results were similar when the CPAs reviewed eleven contractors in 2001. While there is clearly room for improvement, these reviews have shown significant progress and reflect CMS�s continuing commitment to ensuring its contractors generate accurate financial statements. We plan to conduct similar reviews until HIGLAS is implemented. In addition, the CPAs are assessing the adequacy of the contractors� internal controls over their financial management practices to ensure the integrity of their operations. CMS also increased the scope of these reviews to include an assessment of the timely implementation of contractor corrective action plans (CAPs), as required by the Chief Financial Officer's audit.

CMS� goal for FY 2001 was to refer a cumulative total of 60 percent of the Agency�s eligible delinquent debt, or approximately an additional $2 billion in FY 2001, and CMS met that goal. By the end of FY 2002, CMS�s goal is to refer 100 percent of its eligible delinquent debt. In order to reach these goals, which are included in the Agency�s annual performance plan, CMS is analyzing other categories of debt including Medicare premium debts, civil monetary penalties, as well as managed care debt to determine appropriate referral strategies.

Monitoring CMS�s Debt Referral Under DCIA. CMS is aggressively addressing the issues regarding past debt collection efforts and has taken several concrete actions to improve its debt collection processes and ensure that its debt collection efforts are consistent with DCIA. The systems and ad-hoc spreadsheets used by Medicare�s contractors have not always produced data that were adequately supported and, as a consequence, the Agency�s auditors have had difficulty validating the accounts receivable balances. HIGLAS will address these concerns.

In addition, it is important to note that CMS has issued enhanced policies and procedures for debt reporting and DCIA debt referral to all of CMS�s contractors and regional offices. These procedures allow the Agency to refer more debt, more quickly, to address concerns set forth in the GAO's report. CMS also plans to review contractor compliance with these procedures during 2002, as part of the Agency�s annual review of contractor performance. To date, CMS has referred more than $4 billion of the eligible $6 billion delinquent debt as required by the DCIA.

Since 2000, CMS has performed extensive analysis of its delinquent debt, focusing on the likelihood of collection and the write-off of uncollectible debts. In addition, CMS issued new policies to its contractors on the reporting of delinquent debts to properly reflect accounts receivable balances at their true economic value. The policies provide for identification and write-off/adjustment of MSP settlement-related Group Health Plan debt, MSP debt write-off of old uncollectible debt, and referral of debt under the DCIA. The Agency also revised policies regarding the definition of an accounts receivable including the treatment of unfilled cost reports and the allowance for uncollectible accounts, recognizing and reporting non-MSP currently not collectible (CNC) debt, and Medicare contractor financial reporting instructions. These actions will assist the Agency in meeting the requirements of the DCIA.

The Department�s performance in regards to referrals of delinquent debt has been steadily improving. The DCIA requires the referral of delinquent debt for cross-servicing by the Treasury Department and for offsetting with Federal payments. In these areas, we are proud to say our performance is continuing to improve.

HHS established its own centralized administrative operation, the Program Support Center (PSC), as the central debt management organization for HHS in 1996 as a matter of efficiency and cost effectiveness. Subsequently, PSC was designated by Treasury as a Debt Collection Center for certain types of HHS health care debt. PSC�s debt collection efforts are supported by direct access to HHS health care agencies who help ensure that these debts are legally enforceable, thus increasing the likelihood of collecting these unique types of debt.

We have made significant improvement in the percentage of delinquent debt that has been referred to PSC for collection, from 3.7 percent in FY 1999 to 26.2 percent in FY 2000. As required by the DCIA, we are also referring delinquent debt to Treasury for cross-servicing and the Treasury Offset Program for collection. The rate for all types of delinquent debt referrals for HHS has increased by an average of 23 percent from FY 1999 to FY 2000.

In addition, while our greatest challenge has been identifying and referring health care debt, we have referred a total of 60 percent of the eligible health care debt, or approximately $4 billion through FY 2001. We have met our performance goal. Since the DCIA was passed in 1996, we have referred more than $4.0 billion. We will not stop there. By the end of FY 2002, our goal is to refer 100 percent of eligible delinquent debt.

HHS has made significant progress in managing its receivables, from increasing its collections, to focusing efforts on analyzing delinquencies, and increasing its referrals for cross-servicing and offset. The actions we are taking and improvements we are making are essential in achieving our long-term goals to continue to meet the requirements of the DCIA. HHS continues to strive for full collection of all debt owed to this department on behalf of the American taxpayers. I will be happy to answer any questions that I can at this time, or get back to you with any additional information you may need.