Administration of Medicare: A Neglected Issue, The

Administration of Medicare: A Neglected Issue, The

Stanton, Thomas H

The administration of Medicare urgently needs attention. Although the Centers for Medicare and Medicaid Services (CMS) currently pays claims promptly, Medicare’s administration is weakened by CMS’s limited capacity and flexibility, and especially by neglect of investment in its people and systems. The growing gap between the agency ‘s capacity and its responsibilities contributes to a loss of stature, which in turn fosters congressional micromanagement and further loss of capacity and flexibility.

Disinvestment in Medicare ‘s administration reflects similar neglect across much of the federal government. Medicare’s potentially powerful constituency of beneficiaries, which has a stake in improved administration, has been silent on this issue. Federal agencies and programs generally would benefit from restoration of the capacity that once existed in the Executive Office of the President to improve executive branch organization and management.

I. Introduction: Medicare and the Vending Machine Model of Government

A review of the literature concerning Medicare reveals attention to important issues like the funding of the program, proposed new areas of coverage such as prescription drugs, the impact of demographics on the program, and possible new ways to pay providers. With exceptions such as reports by the General Accounting Office (GAO) and a recent study by a panel of the National Academy of Social Insurance (NASI), analysts and scholars have not devoted the same level of attention to studying the administration of Medicare and the implications of administration for the success of the program.1

It is time to focus on the administration of Medicare. This Article contends that Medicare’s administration is both weak and in serious decline.2 Weak administration does not bode well for a program as large and complex as Medicare, which seeks to pay almost $250 billion annually in claims for medical services provided to about forty million beneficiaries.3 Weak administration presents even more of a problem given the substantially increased demands that the program will face as the baby boom generation retires and becomes eligible for Medicare.

Many of Medicare’s administrative shortcomings result from a significant disparity between its responsibilities and resources, both in personnel and dollars. At the inception of the Medicare program, providers expressed apprehension about governmental intervention into health care.4 As a result, the government created a different structure for administering Medicare than for administering Social security. The Social security Administration (SSA), with an in-house staff of 63,000,5 processes Social security payments directly to over forty-five million beneficiaries according to a schedule of benefits that is easy to administer.6 By contrast, the Centers for Medicare and Medicaid Services (CMS), formerly the Health Care Financing Administration (HCFA),7 currently has an in-house staff of fewer than 5,000. CMS, however, must administer a much more complex set of payments for Medicare services for almost as many beneficiaries through numerous third parties that together employ another 22,500 people.8

The gloomy assessment of the Medicare administration that this Article presents, however, must be tempered with recognition of the positive points. CMS regularly publishes its payment regulations on time and assures that about a million providers are paid on time for the 900 million claims that they file annually.9 This prompt payment is an impressive accomplishment, especially for an agency as small as CMS. Unlike some troubled agencies, CMS continues to have an unblemished record for the integrity of its officials. This is a base on which the agency can improve the administration of Medicare. Many of the problems besetting Medicare administration reflect the impact of external forces rather than insurmountable problems within CMS.

The weakness in the administration of Medicare, and general inattention to that weakness except at a fairly high level of analysis, is puzzling. The forces that have weakened Medicare administration resemble those that also have weakened other areas of government. Yet, in contrast to many other government programs, Medicare benefits from the widespread support of an influential and well-organized constituency of beneficiaries.10 Medicare would seem to be one part of government where the political process would demand and achieve effective administration.

For Medicare, the need for effective administration is especially important because of the pressures caused by increasing health care costs. Congress has tightened limits on Medicare payments to the point that some providers are limiting or ending their participation in the program. As a result, the benefits of an effective payments system could be immense. Malcolm Sparrow, a Healthcare fraud expert, estimates that the Medicare program is losing fifty to seventy-five billion dollars annually to fraud.” An improved payments system that could detect fraud schemes early would help ease the financial pressure on the program.

Part of the puzzle can be explained by the general inattention paid to administration except by the most sophisticated interest groups.12 Political scientist Donald Kettl suggests that many Americans, including congressional policymakers, have a “vending machine” model of government-we place money into a program and goods and services emerge.13 The vending machine model leaves little room to consider the complexities of managing the people, money, and systems needed to make a government program work.

Why have policymakers neglected the machinery of government? Those experienced in the ways of Washington, D.C. give the expected answers: (1) administration is not nearly as rewarding politically as the actual services delivered to constituents; and (2) more money for administration means more money for bureaucrats and the bureaucracy.14 Those who adopt the vending machine model tend to ignore important matters such as the differences among programs and the need for careful attention to the resources, organization, and management needed to keep the machinery operating well.

The Medicare program is structured, at least superficially, to embody the vending machine model. Sallyanne Payton and others have pointed out that beneficiaries pay little attention to administration because Medicare is required to pay virtually all claims within thirty days.15 As long as the program works well enough to meet this basic demand, beneficiaries see little need to concern themselves with the machinery that produces these results. Indeed, this inattention can be seen as a triumph of Medicare administration: because CMS routinely makes its benefit payments on time, beneficiaries have little incentive to discover the complicated and deficient administrative systems that produce those benefits.16 Only beneficiary advocacy groups, who have a stake in the long run viability of the Medicare program, might have an interest in paying attention to Medicare administration. But these groups also seem to have largely neglected the issue.17

This Article is organized as follows. Part II examines the administration of Medicare from the perspective of the capacity, the flexibility, the accountability, and the life cycle of CMS, the administering agency. Part III assesses the consequences of the decline in the quality of Medicare administration. Part IV looks at the disinvestment that has weakened Medicare administration and the administration of many government programs. Part V makes recommendations for improving the administration of federal programs, including Medicare. It then concludes that the beneficiary constituency of Medicare is a valuable potential source of support for improvements in the administration of the program. More generally, improvements in the administration of government programs will require a restoration of capacity in the Executive Office of the President (EOP) to provide guidance and support for those improvements. Both beneficiary groups and policymakers will benefit from looking beyond the vending machine model to address the major issues of administration that confront many government programs today.

II. Inside the Vending Machine: The Administration of Medicare

Four criteria can help to evaluate the administrative ability of CMS to administer the Medicare program:18 (1) Capacity: What is the capacity of CMS, in terms of people, administrative budget, systems, and needed organization to administer the Medicare program; (2) Flexibility: What flexibility does CMS have, under the law and in practice, to administer the program; (3) Accountability: How is CMS held accountable for its administration of Medicare; and (4) Life Cycle: As the agency matures, what strengths and shortcomings manifest themselves?

Application of these four criteria to the administration of Medicare reveals that, although CMS is currently paying claims promptly, the agency has shortcomings in capacity, flexibility, and forms of accountability. In addition, the emergence of serious life cycle issues means that attention to administrative issues is of great importance in order to ensure the quality of the agency’s performance in the future. Consider each of the four criteria in turn.

A. Capacity

The capacity of Medicare administration is seriously constrained by limitations on resources. Resource limitations result in inadequate staffing, systems, and funding. The inadequate staffing of CMS is striking. In 2002, CMS had only 4,497 full-time-equivalent (FTE) employees.19 This number is less than the 4,961 FTE employees the agency had in 198020 when the workload and number of beneficiaries were much lower.

Tight staff ceilings are a special problem for an agency such as CMS that needs to keep up with developments in healthcare and technology. One consequence of the agency’s limited ability to hire is that CMS has a graying workforce.21 In February 2000, the HCFA Administrator testified that over one-third of the agency’s employees would be eligible to retire in the following five years,22 depriving the agency of a potentially large number of workers with valuable institutional memory.23

Funding constraints for Medicare’s administration are severe. Figure 1 on page 9 shows the dramatic decline in Medicare administrative expenses as a percent of benefit payments from 1970 to 1999.24 In 1999, a group of fourteen prominent healthcare policy experts from across the political spectrum signed an open letter calling for Congress and the administration to address the “crisis facing HCFA and millions of Americans.”25 The letter stated that limited resources and lack of administrative flexibility threatened to cripple the administration of Medicare:

The mismatch between the agency’s administrative capacity and its political mandate has grown enormously over the 1990s. As the number of beneficiaries, claims, and participating provider organizations; quality and utilization review; and oversight responsibilities have increased geometrically, HCFA has been downsized.26

Calls for increased administrative resources also have come from the Medicare Payment Advisory Commission (MedPAC)27 and the Study Panel on Medicare’s Governance and Management of NASI.28

When the SSA administered Medicare, the program’s administrative budget was significantly higher than it is today. At that time, the administrative budget amounted to 3.1 % of the total program for Part A (care in hospitals and other institutional settings), and 11% for part B (physician, other professional, and specified services and supplies).29 However, by 1999, those numbers decreased to 1.5% and 1.9%, respectively.30 By contrast, private sector administrative costs of insurance companies, for example, can range from 12% and higher.31 A private insurer, however, would have some costs, such as marketing, underwriting, taxes, and the need to make a profit, which CMS does not incur. But the point remains that CMS’s administrative expenses are seriously under-funded.

Although technology is changing the nature of the work required for Medicare administration, CMS often has been unable to keep up with these changes. The agency is limited in the systems that it can acquire or modernize. Some of the critical CMS information systems are decades old and rely on operating software that is rarely used by any entity other than CMS.32 In addition, many of these systems are incompatible with one another.33

Major contributors to the problem are the lack of adequate resources for administration of the Medicare program and the lack of a multiyear commitment for the funding that is needed for any major acquisition. As the GAO reported, “CMS’ IT [information technology] projects compete for resources with other agency responsibilities of national importance, some of which are also lacking in funds and staff.”34 The GAO calls the allocation of funds for IT in this environment “a difficult juggling act.”35 Allocating funds for a financial management system meant that CMS had to decrease or eliminate funding for other systems, including a centralized national provider enrollment database and a contractor-monitoring database.36 The third-party administration of Medicare is another part of the problem. CMS administers its claims payment process through a myriad of contractors that operate divergent systems. This variation greatly complicates the design of any common system.

Perhaps most importantly, the agency has been unable to develop the capacity needed to modernize its claims payment systems. HCFA failed at its effort in the 1990s to create a single modern claims processing system.37 Any long-term effort to improve the claims payment systems will require a multiyear commitment of funds plus a well-conceived technology plan backed by the inhouse expertise needed for implementation. As the GAO testified:

Owing to a failed attempt in the 1990s to modernize Medicare’s multiple information systems, HCFA’s current systems remain seriously outmoded. Without effective systems, the agency is not well positioned to collect and analyze data regarding beneficiaries’ use of services-information that is essential to managing the program effectively and safeguarding program payments.

The absence of such monitoring systems results in the agency lacking the ability to manage its core programs effectively. In addition, fraud and abuse activities can drain resources from the Medicare program more easily if the agency does not have the proper systems in place.39 The CMS information systems can take months to respond to a query before generating information about the services that beneficiaries receive and the payments made to providers.40 The absence of proper information technology systems means that too much of the Medicare claims payment process is left to law enforcement after fraud and abuse actually are detected. Both providers and beneficiaries have a stake in improved CMS IT systems that will reduce the pressure for fraud and abuse enforcement.41

Tight resource constraints also result in CMS lacking the ability to increase the level of payments for Medicare contractors to process claims, engage in program safeguard activities, and otherwise play a major role in administering the program.42 Nancy-Ann Min DeParle testified that when she led the agency, HCFA reduced the cost to process a Medicare claim to about one dollar as a means of stretching the contractor budget.43 To reduce processing costs and shift to electronic claims, the agency again engaged in a juggling act. To accommodate increased spending in areas such as beneficiary education and outreach, HCFA permitted its contractors to reduce other services.

For example, HCFA eliminated the toll-free lines that physicians used to call carriers with questions about Medicare billing.44 It then reinstated these lines, presumably because of complaints from providers who find Medicare billing rules to be too complicated and difficult to understand.45 The reinstatement of these lines on a shoestring budget, however, was not enough to do the job. In 2001, the GAO reported that it had tested the carrier provider inquiry lines and found them seriously wanting.46 The GAO placed about sixty calls to the provider inquiry lines of five different carriers and asked three test questions taken from the “frequently asked questions” page on the carriers’ own web sites.47 The GAO found that only 15% of the carrier responses were complete and accurate while 53% were incomplete and 32% were entirely incorrect.48 The GAO found that scarce CMS resources and understaffmg contributed to the problem.49 Undoubtedly, given the outcry that followed the disclosure of the GAO results, CMS will induce the carriers to improve their provider communications. The only question remaining is which important administrative activities the agency must curtail to accommodate the new priority.

Payment of hundreds of billions of dollars of claims annually is a major challenge, which is compounded by the frequent modifications needed to deal with annual updates in fee schedules, new policies, and changes in the law. In 2000, Medicare’s claims contractors, the carriers and fiscal intermediaries that pay claims on behalf of CMS, received over 700 change orders.50 These orders required changes in the way that payments are calculated or paid.51

Lack of adequate capacity also means that CMS cannot meet the congressional demands for new regulations and notices, which are needed to implement new laws that adjust the Medicare program. In 2001, Nancy-Ann Min DeParle testified that since 1996, Congress had enacted five major pieces of legislation that required HCFA to implement over 700 provisions for Medicare and other programs.52 The Balanced Budget Act (BBA) alone contained “some 335 provisions requiring changes, in some cases major changes, to virtually every aspect of the Medicare program, as well as substantial changes in Medicaid.”53 HCFA published thirty-nine regulations and seventy-one notices to implement the BBA, but this was insufficient to implement the law completely.54 As Timothy Jost points out, the issuance of regulations by CMS has been prodigious, but insufficient.55 Some rulemaking proceedings have taken over a decade. The immense regulatory workload that results from the structure of the Medicare program, repeated congressional enactments that require yet further regulations for implementation, and resistance from powerful constituent groups all contribute to cause the delay.56

People who follow the Medicare program closely paint a bleak picture of the consequences ofCMS’s incapacity. They describe management of Medicare today as management by crisis.57 To deal with the most pressing problems of the moment, CMS must cannibalize people and resources from other activities. No continuity in projects and no long-run plan for improvement exist. CMS sacrifices other priorities to meet short-term demands. This sacrifice results in gaps in information and performance. Even though the core mission of the agency revolves around making proper payments to providers, the agency is unable to link patient-level data across sites of care or easily aggregate information about the adequacy of the payments that providers receive for Medicare services.

The constraints on resources for Medicare may reflect not only the general disinvestment of government, discussed in Part IV below, but also concerns about the possible consequences of strong and capable Medicare administration. For example, Sallyanne Payton suggests that:

In the great American political debate Medicare has a unique place because it is an age-delimited piece of a universal national health insurance program, the rest of which might be created in an appropriate political moment . . . . Actions affecting Medicare tend to be evaluated politically, therefore, for their potential to advance or retard the cause of national health insurance, for their effect in creating or tending to block the creation of an administrative infrastructure sufficient to allow the government to make a credible claim that it can administer a national health insurance system, and for their potential to push future development toward one model or another of government-sponsored health coverage.

Indeed, some policy makers cite the shortcomings of Medicare administration as reasons to consider moving to other models of healthcare delivery, such as the management of private plans in a system comparable to the Federal Employees Health Benefit System. The basic structure of the Medicare program and the role of CMS in administering Medicare now are matters for open political discussion. In summary, CMS lacks the capacity at multiple levels-including administrative, budget, staffing, and systems-to carry out its work properly. The vending machine may be functioning, but not with the correspondence between resources and functions that was apparent in earlier years and that is needed today.

B. Flexibility

The administration of Medicare is constrained by a number of inflexibilities. Major inflexibilities relate to managing the activities of the contractors and other third parties that carry out the administration of Medicare. Figure 2, below, sets forth the major functions of Medicare, including the setting of prices for fee-forservice Medicare services, claims processing and payment, and overseeing the quality of institutional care.59

In all of these activities, CMS relies heavily on third parties. The setting of prices for fee-for-service physician services, for example, depends on the Current Procedure Terminology (CPT) codes that the American Medical Association establishes and updates.60 The most important of Medicare’s administrative functions is the setting of prices annually and the payment of claims. CMS does not pay claims directly. Instead, CMS depends on numerous Medicare fiscal intermediaries and carriers as claims administration contractors, which together employ thousands of people.61 These contractors help CMS administer the Medicare program, including the processing of claims for hospitals and providers. In addition, CMS contracts with other firms to provide so-called program safeguard services, including monitoring to detect fraud and abuse.62 By contrast, CMS has fewer than 5,000 in-house staff members to manage not only the Medicare program, but also Medicaid and other healthcare programs.63

Heavy reliance on third parties causes significant inflexibility in the administration of Medicare. Besides being limited by the disparity in size between its inhouse staff and the size of the claims administration contractors, CMS also is limited administratively by the terms of its relationship with them. Under the law, provider associations, rather than CMS, nominate fiscal intermediaries.64 The providers have selected Blue Cross and Blue Shield Plans and the National Blue Cross/Blue Shield Association as contractors.65 Carriers must be insurance companies.66 Although the Medicare law does not specifically exempt these contracts from provisions of the Federal Acquisition Regulations (FAR), the provider nomination provisions of the law “have always been understood as necessarily overriding the usual government contract requirements for competitive bidding.”67

In addition to being awarded without full and open competition, the contracts also must cover the entire range of claims processing and related activities, with exceptions such as work that has been delegated to the program safeguard contractors. The contracts cannot be terminated without cause and without providing the contractor with an opportunity for a public hearing,70 The contracts may not provide performance incentives and must be cost-based rather than performance-based.71 CMS also must rely on many other third parties to administer its programs. These programs include state agencies needed to oversee institutional providers, such as skilled nursing facilities, home health agencies, and dialysis facilities, and to certify that they meet Medicare’s standards. Likewise, these third parties include certain providers, such as hospitals, that must attain accreditation by the Joint Commission on the Accreditation of Health Care Organizations or other accrediting bodies.72

For CMS, these third parties create a number of inflexibilities. First, the use of contractors creates a bureaucratic division between CMS and the contractors that provide the services. This bureaucratic division costs CMS information about the program it must administer and also removes significant management flexibility. The carriers and fiscal intermediaries, in addition to the people that work for them, have connections with members of Congress. Among other consequences, when carriers or fiscal intermediaries consolidate, CMS comes under pressure to assure that the employees of the merged institutions are protected, even if efficiency might be achieved through closure of some facilities.

Second, the bureaucratic divisions among contractors create inflexibility. Contractors use divergent payment systems to pay claims to the providers that they serve.73 CMS has worked assiduously over the years to reduce the number of payment systems that contractors use to pay Medicare claims and has succeeded in reducing the number. Lack of uniformity of payment systems creates difficulty for CMS in trying to link claims either to providers or to beneficiaries across the United States. The results in terms of the creation of openings for fraud and abuse can be imagined, but are harder to quantify. The results in terms of frustration of providers, including many companies that serve multiple states, are more directly palpable.

The problem of bureaucratic division also arises in other contexts. For example, the new program safeguard contractors, created pursuant to the Health Insurance Portability and Accountability Act (HIPAA) in 1996, have assumed many of the functions of trying to assure that payments for claims are proper, including audits and investigation for possible fraud.74 Many of these functions are supposed to be taken over from the claims administration contractors. One can imagine, in a system hungry for resources, that the transfer of these functions and the needed cooperation of the existing claims administration contractors with the new program safeguard contractors will not always take place smoothly.

A third inflexibility derives from the fact that CMS is limited to the terms of its contracts with each contractor. Without adequate funds or authority to create incentives for good performance, CMS lacks the ability to create good performance, especially among the claims administration contractors. The extent to which the system of contractors actually has become dysfunctional is surprising. Numerous outside reviews have found that the contractors may fail to check provider claims properly to prevent payment errors.75

One predominant reason for this substandard performance relates back to the capacity of Medicare administration and the limited resources that the government has dedicated to pay for processing claims. It would cost a carrier or fiscal intermediary much more to create and operate a system for paying each claim for the appropriate amount than merely to pay each claim promptly. Carriers and intermediaries have no incentive to audit or investigate questionable claims. As with other financial services where a federal program is subject to excessive parsimony, the government tends not to get more than the quality of service that it paid for. Moreover, as noted above, the law limits CMS to cost-based reimbursement contracts.76 These constraints, coupled with nearly flat payments to contractors, have resulted in a shrinking pool of available companies. Since 1980, the number of Medicare contractors has dropped by half, indicating that these companies do not find Medicare business as attractive as in the past.77

Another major area of inflexibility for Medicare administration concerns the limitations on CMS’s ability to hire, promote, and terminate employees. The agency also is limited in its ability to contract for services. In addition, it is restricted in its ability to adjust its administrative budget in response to changes in demand for Medicare services. These inflexibilities affect many agencies across government. However, the consequences are more pronounced for a major program such as Medicare that serves forty million beneficiaries.78

CMS would benefit from various forms of personnel flexibility that Congress has granted to other agencies.79 These areas include the creation of excepted service positions so that CMS could hire a limited number of people with specialized skills in medicine, information technology, or finance at levels of compensation somewhat greater than the usual civil service limits. CMS also would benefit from the creation of a program of term appointments, allowing the agency to hire people for terms of up to five years. This flexibility could infuse the agency with people that have fresh skills and perspectives, who might not be ready to sign up for a full civil service career.80 CMS also needs some basic flexibility in the personnel area. Currently, CMS has only fifty-four Senior Executive Service (SES) positions, ten of which are noncareer.81 The GAO has testified that this is a far lower allocation of SES positions than Congress has provided for other agencies with significantly smaller budgets and less onerous responsibilities.82

The shortcomings in CMS’s authority to contract for carriers and fiscal intermediaries have already been noted.83 Numerous commentators, including GAO officials and former HCFA administrators Nancy-Ann Min DeParle and Bruce Vladeck, have called for modernization of the statutory requirements relating to carriers and fiscal intermediaries.84 Needed changes include: (1) subjecting these contractors to competition so that low performers have an incentive to improve; (2) expanding the types of firms that are eligible to compete; and (3) removing a statutory provision that requires these contractors to be paid on a cost-basis and that prohibits them from making a profit.85

Both houses of Congress passed legislation in the 108th Congress to improve the relationship between CMS and its contractors and to permit competition among claims administration contractors.86 Competition would be a great step forward, but it should not be assumed that it would be a panacea. The contracting process will be cumbersome and slow. Consider, for example, TRICARE, the military health system administered by the Department of Defense that provides health benefits to over eight million active duty personnel, their dependents, and retirees.87 A GAO review of the TRICARE health coverage program found numerous shortcomings.88 TRICARE is much smaller than Medicare in the number of beneficiaries it serves and it uses competition to select its health care contractors.89 The GAO reported that a single contract proposal consisted of 33,000 pages, and one contractor official stated that the company proposal cost about five million dollars to bid.90 Because of the costs to prepare a proposal, bid protests were common.91 The contracts are large, complex, and prescriptive in nature.92 The need for numerous change orders (that is, required changes in work, compared to what was specified in the original contract agreement) has made costs difficult to predict and has created funding shortfalls.93 Finally, once again for CMS, the issue of resources will be paramount. In good part, the strength of the CMS relationship with its contractors will depend on the resources that the agency is permitted to devote to paying contractors for good work and to assuring their performance.

The current relationship of CMS with its carriers and fiscal intermediaries is symptomatic of the general inflexibility of the Medicare program. The law provides that “any willing provider” that is properly certified may provide Medicare services and receive payment.94 This reflects a culture of Medicare that resists changes to permit greater flexibility in the delivery of Medicare services. While a panel of NASI proposed that the management of Medicare should include more innovation and pilot programs, efforts such as the demonstration programs to bring price competition to Medicare+Choice plans have foundered because of constituency concerns.95 As the GAO has concluded in a different context, “Medicare’s particular dilemma is that the number of special interests affected and the dollars involved make it difficult even to test on a limited basis the prudent purchasing techniques employed by the private sector.”96

Finally, CMS is subject to budget inflexibility that has limited the agency’s ability to make the investments in staffing, systems, and contractor payments that are needed to keep up with its burgeoning workload.97 The Medicare budget is divided between mandatory dollars to pay for services and discretionary funds to pay for administration.98 This means, as Robert Berenson and Dean Harris point out, that investments in increased program effectiveness would involve increased spending on program administration while the savings would accrue to the Medicare trust funds.99 One option for overcoming this problem, albeit not without its own defects, would be to set the administrative budget for Medicare according to a formula related to the program’s payments for services.100 Another option would be to create a special administrative fund similar to the Health Care Fraud and Abuse Control (HCFAC) account that funds fraud and abuse activities of CMS and other agencies.101 As a part of the reporting requirements of the law, the agencies submit an annual report that includes a discussion of the activities for which funds have been expended and the monetary results of activities.102 This latter option would preserve accountability to Congress while allowing CMS increased flexibility to make investments in improved Medicare administration.103

C. Accountability

CMS is accountable for its administration of Medicare both to higher levels of the Executive Branch and to Congress. Congress enforces accountability through the power of the purse, the power to hold hearings, and the power to change the law that authorizes both CMS and the Medicare program. In the case of CMS, congressional accountability has turned into congressional micromanagement. As described earlier, Congress regularly changes the details of the Medicare program.104 Former HCFA Administrator Bruce Vladeck points out that many of these changes are enacted at the behest of narrow interests.105 He points to statutory provisions that skew prospective payment systems towards particular classes of providers, which also include express preferences for particular hospitals.106 Under these circumstances, he sees the prospective payment system as losing much of its simplicity and rationality to become more like the Internal Revenue Code.107 In 2000, the HCFA Administrator, Nancy-Ann Min DeParle, testified that:

In the two and a half years that I have been Administrator, HCFA has been the subject of more than 1100 audits and oversight reviews by the General Accounting Office and HHS [Health and Human Services] Inspector General. We receive, on average, more than 700 letters a month from members of Congress, and our contractors receive thousands more.108

In addition, congressional committees and subcommittees hold large numbers of oversight hearings with respect to CMS and Medicare.

CMS also is held accountable for the actions of third parties that help to administer the Medicare program. As Lester Salamon and others have pointed out, the use of third parties to deliver public services creates management challenges and can complicate the lines of accountability.109 This complication can be seen most clearly in the case of the contractors that pay Medicare claims. Indeed, several of CMS’s claims administration contractors committed fraud against the program.110 A 1999 GAO report summarizes the problem:

Since 1990, nearly one in four claims administration contractors has been alleged-generally by whistle-blowers within the company-to have integrity problems; GAO identified at least 7 of HCFA’s current 58 contractors as being actively investigated by the HHS OIG [Office of Inspector General] or Justice. Since 1993, HCFA has received criminal and civil settlement decrees totaling over $235 million from six contractors after investigations of allegations that the contractor employees deleted claims from the processing system, manufactured documentation to allow processing of claims that otherwise would have been rejected because the services were not medically necessary, and deactivated automatic checks that would have halted the processing of questionable claims.111

Moreover, the strong constituencies that surround the Medicare program also impede CMS’s ability to manage the program in an accountable manner. Timothy lost points out that providers have impeded CMS’s ability to issue regulations to implement laws.112 Providers also have registered strong objections to CMS’s efforts to improve the collection of information, for example with respect to documentation of provider claims.113 CMS seems to be caught in a bind-it is held accountable for administrative shortcomings, but often lacks the political backing or the tools to hold third parties or program participants accountable. Sometimes the missing tools involve statutory limitations as well as lack of political backing, such as when Medicare pays higher prices for medical products than other payers.114 Other times, such as when CMS relies on states to conduct surveys of quality of care of nursing homes, home health agencies, and kidney dialysis facilities, CMS is held accountable for shortcomings in state performance.115

The atmosphere has turned negative for CMS.116 Indeed, one of the reasons the agency changed its name was to try to diminish some of the opprobrium that was perceived to attach to HCFA.117 Much of the criticism of CMS has been misdirected and should be directed instead at the nature of the Medicare program, with its complexities, constantly changing statutory prescriptions, and a political context that prevents CMS from adopting useful efficiencies that would be available to a private sector company in a similar business. One may fear that the discrediting of CMS has reached such proportions that Congress is in danger of allowing CMS to become the ineffective agency that some vocal constituents so often deride. The agency must be held accountable, but the current relationship with Congress is not the way to assure good performance. Not only beneficiaries, but also members of Congress, maybe ignoring the needs of good administration because they have adopted the vending machine model of how Medicare should operate.

D. Life Cycle

Three types of life cycle issues can complicate the effectiveness of an administrative agency. The first relates to design flaws that were built into program administration at the inception of an agency or program. The second relates to the institutional culture that results from an agency’s history. The third relates to changes in an agency’s staffing and systems as the agency matures.

Similar to many other agencies and programs of the federal government,118 CMS and Medicare are limited administratively by political compromises made at the start of the program. While the reliance on so many third parties, each with its own constituency and influence, makes the administration of Medicare a daunting task, the costs of third-party governance were foreseen at the inception of Medicare and were understood to be the price for obtaining provider support for the new program.119 Sylvia Law cites a 1962 memorandum of a task force of the Department of Health, Education and Welfare (now HHS) that highlights the tradeoff, in this case with respect to the use of Blue Cross in program administration:

A considerable price would be paid in order to get the initial public relations advantages with professional groups that might come from using Blue Cross, e.g., loss of direct contact with providers so that the Federal Government would not have detailed knowledge of problems and because of this, the loss of ability to react quickly to problems of administration, budget, program, etc.120

The second life-cycle issue relates to the origins of an institution’s culture. The pressures in 1965 to start the Medicare program and to prepare to process the claims of nineteen million people eligible for the program within one year had the effect of emphasizing ability to pay claims quickly rather than assuring that claims were paid correctly:

The basic driving force behind all of the early efforts in establishing the Medicare system was to pay bills. Congress, the presidency, SSA, and its contractors all feared the political reverberations, the public frustration, and the disillusionment that would set in if the system fell apart because of the complexities of processing and paying claims . . . . [A]s a result of the major concern to achieve operational readiness quickly, little attention was paid in the first few years to the problems of cost control. . . .121

At its inception, administration of Medicare was assigned to the SSA.122 CMS (then called HCFA) was not created until 1977.123 The administration of Medicare by the SSA also affected the outlook of the people responsible for Medicare-they saw their function as the prompt payment of Medicare claims, comparable to the agency’s obligation to make prompt payment of Social Security benefits.124

Unfortunately, the analogue between administration of Medicare and Social Security is misplaced. Social Security uses a large in-house staff to make payments directly to beneficiaries. By contrast, Medicare relies on third parties who pay the claims of yet other third parties, such as doctors, hospitals, and skilled nursing facilities for Medicare services. These third parties have interests that may not coincide with those of the government or of beneficiaries.125 This conflict of interest, along with the annual changes in Medicare coverage and payment levels, requires the agency that administers Medicare to take on the responsibilities of a regulatory agency to assure not only that Medicare claims are paid promptly, but also that they are paid in the appropriate amount.

Even after the transfer of Medicare to the new HCFA, federal officials seemed reluctant to take on the role of a regulatory agency. As a former HHS General Counsel wrote:

Put simply, HCFA has viewed itself as a check-writing agency whose missions are to determine when people can receive money for doing something and then to pay that money when they do it. Historically, it has not viewed itself as a regulatory agency and has resisted legislative efforts to transform it into one.126

This pattern changed only in the 1980s, with enactment in 1983 of the Prospective Payment System for hospitals and the enactment in 1989 of the Medicare Fee Schedule for physician payments.127 As Jonathon Oberlander observes, these enactments were “regulatory revolutions” for Medicare:

Cost containment became the administrative hallmark of HCFA, which saw itself in terms of health financing and purchasing of medical services. Fiscal pressures were the driving force behind Medicare reform, and in contrast to SSA’s mission as protectors of social insurance, Congress looked upon HCFA to protect the federal budget.128

Only in the 1990s did the agency begin to address the problem of fraud and abuse in a serious way. Moreover (and this may reflect resource constraints as well as the difficult political context for effective action), the agency seemed unable to issue many of the regulations needed to implement legislation that Congress enacted. The most recent GAO report on Medicare as a high-risk program lists one program area after another where the agency has neglected to promulgate regulations that the GAO believes are appropriate for proper implementation of the Medicare program.129 Indeed, Michael Astrue, the former HHS General Counsel, contends that at least some congressional enactments have come about because of exasperation in Congress about Medicare administration and a feeling that enacting a new law is the best way to assure that the program is implemented in a way that reflects congressional intent.130

The third life-cycle issue involves changes in the strength of a maturing agency. The decline in resources for administration of Medicare and tight limits on the size of the CMS workforce already have been noted.131 Workforce limitations mean that an agency’s personnel tend to get older as personnel constraints prevent the hiring of younger cohorts.132 The agency faces staff shortages, both in terms of skills and numbers,133 and the shortages will be exacerbated as older staff retire. As noted earlier, CMS now is facing the prospect that roughly one-third of its workforce will be eligible to retire in the next five years.134 Many of the successors who will be recruited or promoted to replace the retirees are unlikely to possess either the institutional knowledge or the skills needed to administer the program well.135

In summary, an evaluation of the capacity, flexibility, accountability, and life cycle of CMS reveals an agency that is losing its ability to administer the Medicare program. While the vending machine metaphor may characterize the general perspective of policymakers and Medicare beneficiaries, the actual administration of Medicare-once Congress has placed the money into the system and specified the types of outputs that it desires in any particular year-reveals the shortcomings of the perceived model. Unseen by policymakers and beneficiaries, the innards of the administrative system are losing their strength.

III. The Decline of Medicare Administration: Does it Matter?

In the vending world, when a particular machine becomes old, decrepit, or obsolete, the vending company will replace it with a shiny new one. By contrast, CMS and Medicare have been subject to a relentless combination of external pressures and increasing demands that have left CMS without much of its original ability to administer the program.136 What are the consequences of this weakening of Medicare administration?

On the one hand, one should recognize that, for all of the challenges it faces, CMS has done a remarkable job of holding together the administration of Medicare. Medicare covers about forty million elderly and disabled beneficiaries and pays on a timely basis $210 billion in claims to about 700,000 physicians, 6,000 hospitals, and thousands of other providers and suppliers.137 For the large majority of beneficiaries, Medicare provides healthcare on a fee-for-service basis.138 CMS contracts with about fifty carriers and fiscal intermediaries, essentially insurance companies, to process almost one billion fee-for-service claims a year.139 Medicare provides coverage to the remaining beneficiaries who are enrolled in 346 private managed care plans, where a single monthly payment covers needed services.140

On the other hand, timely payment is not the same as proper payment of Medicare claims. Rising healthcare costs are calling the future nature of the program into question.141 If Malcolm Sparrow is only partially right in his estimate of a fifty to seventy-five billion dollar annual loss due to Medicare fraud,142 the improvement of CMS’s ability to detect and prevent much ofthat fraud would make a major contribution to restoring confidence in the program, especially in the fee-for-service part of Medicare.

Moreover, providers have a stake in improved administration. First, a number of providers have threatened to leave the Medicare program because of increasing pressure on the level of fees that the programs pays, especially for physician services.143 A reduction in payments for fraudulent claims can increase the resources available to pay legitimate claims. This is especially true because of the relative value scales that Medicare uses to pay claims-to the extent that fraudulent claims may be concentrated in certain specialty areas, providers in other areas of practice will be disadvantaged.

Second, weak payment systems mean that too much of the process of dealing with improper claims is left to law enforcement rather than the claims systems themselves.144 Improved payment systems might help reduce the administrative burdens on responsible providers that today are being subjected to increasing paperwork requirements in an effort to detect improper claims and that currently feel threatened by the prospect of litigation under the False Claims Act.145 Third, the absence of timely and accurate information about the Medicare program undermines CMS’s credibility. For example, when CMS is unable to provide reliable and timely information about providers’ transaction costs-for example, for pharmaceutical drugs and medical products covered under Medicare-and beneficiaries’ use of Medicare services, CMS finds it difficult to defend its position that payments for such services might be reduced.146 Finally, a weakening of administrative capability can cause unexpected trouble. This has happened to government agencies from time to time.147 The immense scale of the Medicare program, and the lack of depth in a system stretched for administrative resources, mean that unforeseen problems could materialize that might cause difficulty to a large number of beneficiaries and providers.

When one balances the benefits and costs of improving the quality of Medicare administration, depriving CMS of the resources that it needs has not been cost effective. CMS has been deprived of needed resources in its budget, staffing, and systems148 CMS also needs other support as well, including political support for improvements in program design that could reduce the costs of the program. For policymakers who adhere to the vending machine model, the lesson is clear-unless the machine is refurbished, it cannot continue to carry out the increased number and variety of transactions that consumers will require from the Medicare program.149

IV. External Forces and the General Decline of Government Institutions and Programs: An Emerging Crisis-The Disinvestment of Government

Medicare and CMS are not the only government programs and agencies with administrative capabilities that policymakers have neglected. Starting in the 1970s and accelerating in the 1980s, many domestic agencies found themselves seriously constrained in available resources to administer their programs. In 1988, Comptroller General Charles A. Bowsher delivered the Webb lecture to the National Academy of Public Administration (NAPA) in which he warned of an emerging crisis, what he called the “disinvestment of government.”150

By the 1990s the crisis foretold by Bowsher began to emerge. Budget and staff cuts have turned many agencies into hollow organizations.151 The United States Commission on National Security/21st Century looked at the activities of agencies relating to homeland Security and found that the Department of State was “starved for resources.”152 Moreover, “[t]he Customs Service, the Border Patrol, and the Coast Guard are all on the verge of being overwhelmed by the mismatch between their growing duties and their mostly static resources.”153 The Commission reported that the problem of hollow government was widespread and not merely confined to the domestic side of government:

As it enters the 21 st century, the United States finds itself on the brink of an unprecedented crisis in competence in government. . . . Both civilian and military institutions face growing challenges . . . in recruiting and retaining America’s most promising talent.154

Once an agency finds itself hampered for resources to carry out its mission, a downward spiral can begin. Members of Congress, especially under circumstances of divided government, begin to perceive that an agency is not carrying out the law in the manner that they wish. The experience of the Department of Housing and Urban Development (HUD) is instructive in this regard.155 A NAPA panel reported, “Problems at HUD made members of Congress uneasy, frustrated, and even angry. . . . Signs of internal management dysfunction at HUD were evident.”156

One of the critical issues of concern to Congress was HUD’s loss of control over the third parties, especially realtors, coinsurers, and mortgage lenders, on which delivery of HUD programs depends.157 In HUD’s case, the loss of control led to actual scandals.158 Otherwise, the description of a cycle of disinvestments, diminished performance, congressional displeasure, and further diminished performance could have been written about a number of federal agencies. The panel’s description of HUD is remarkable for its applicability to other parts of government today:

HUD at mid-1993 was an organization bogged down in programs, regulations, and handbooks, and too distant from its varied communities of users. Though clear on paper, lines of decision-making had blurred among field, regions and headquarters. An inflexibly-applied hiring freeze made it increasingly difficult to manage declining resources as responsibilities expanded. While struggling staff attempted some innovative ways to meet these challenges, more often HUD’s communities of clients were frustrated by increasing delays in reaching decisions and a perceived emphasis on compliance rather than partnerships for solving the nation’s housing and community development problems.159

V. Administering Medicare in the Twenty-First Century: Where Do We Go from Here?

A. Improving the Management Capability of Government Agencies and Programs

The events of September 11, 2001 have brought into sharp focus the costs of hollow government and the neglect of the administrative capacity of agencies to carry out their missions. Many years ago, the EOP included an Office of Management and Organization (earlier a part of the Administrative Management Division), housed first in the Bureau of the Budget and then in the new Office of Management and Budget (OMB), that had responsibility for enhancing the management and organization of government organizations and programs. 16° That office had responsibility for enhancing the institutional capacity of the presidency and, by extension, the rest of the executive branch.161

The OMB today has lost much of its ability to contribute to the management capacity of government agencies. On July 24, 2001, William Clinger, formerly Chairman of the House Committee on Government Reform and Oversight, wrote to Vice President Cheney to express his concern about the consequences for the management capacity of the President:

In my years in Congress I witnessed the erosion of presidential authority, interest, and capacity in management with dismay . . . . Major issues, such as today’s concern about the future of Medicare organization and administration, are being left to the vagaries of subcommittee politics. When asked how the new Medicare proposals should be organized and administered, the Executive Office is silent. The truth is that the President has little in-house capabilities to frame an answer to organizational management issues. He is forced by the vacuum in management capacity and knowledge to become a defensive and reactive player. Presidents nonetheless are going to be held responsible for how well the Medicare program works (whichever variation is adopted) without having much ability to shape the administrative issues in advance.162

In recent years, the governmental affairs and government reform committees of both houses have lost much of their traditional capacity to deal with issues of government organization and management.163 In his memorandum to the Vice President, Clinger related the weak management capacity in OMB to an erosion of the ability of Congress to look at crosscutting government management issues:

The Government Reform Committee in the House used to be able to act as the government-wide watchdog in cooperation with the BOB [Bureau of Budget]/OMB. Personnel issues, for instance, once centralized so that the parts of the larger system could be coordinated and related to one another, are increasingly being assigned to departments and agencies that then deal exclusively with their oversight committees whose perspective is narrow and definitely not concerned with presidential interests. Thus, the weakening of the M in OMB has also meant the weakening of their correspondent committees on the Hill.164

The danger of the many urgent proposals in the aftermath of September 11, 2001 is that they seek to upgrade administrative capabilities with respect to homeland security, but generally leave the rest of the government’s programs in the same sorry state of neglect that they were in before. A strategic organization and management capability in the EOP is needed for the entire executive branch to provide help for agencies and programs across the government. This capability would help enhance the provision of Medicare services, and improve the organizational structure for energy programs, federal housing programs, and other major government commitments that are being implemented by troubled agencies or departments.

The new office might have the following general responsibilities:

* Government Organization: Review government-wide organizational structure on a continuing basis, periodically reporting to the president and Congress on the state of government organization, and submit proposals to improve the performance and efficiency of federal programs and the capacity of federal agencies.

* Cooperation and Coordination: Facilitate interagency and intergovernmental cooperation and assist in developing effective coordinating mechanisms throughout the government

* Systems Improvement: Provide leadership for improvement of agencies’ administrative and program delivery systems. Administrative systems include, for example, personnel, procurement, and information resources.

* Early Warning: Analyze agency capacity and operations, for example, with respect to national homeland security, public health, or financial vulnerabilities, to detect potentially damaging gaps and shortcomings.

* Special Organizations: Oversee the overall operations and management of government corporations, government-sponsored enterprises, quasigovernmental entities, and other institutions with a governmental interest.

* Reorganization and Management Legislation: Develop criteria and standards to be met prior to the submission of legislation to establish new, or reorganize existing, government corporations, enterprises, and other entities with a government interest; provide advice on the workability of proposed programs and legislation as they are being developed.

* Fostering Management Analysis Capacity: Help departments and agencies to develop internal management analysis capabilities.165

The question of location of organizational expertise in the EOP has been a matter of considerable debate within NAPA,166 On the one hand, many Academy Fellows who are current or former OMB officials argue that organization, management, and budget are inseparable. They argue that the design of programs and agencies must be accomplished with close attention to the resources that may be required.167 On the other hand, many other Academy Fellows argue that a fundamental conflict exists between the management and budget functions.168 In their view, the primacy of budget constraints since the 1980s has meant that the budget function inevitably dominates over the issues of government effectiveness that the organization and management function must address.169 They point to a general neglect of the management function at OMB, especially in the past few years, and urge that the organization and management function be in a separate office from OMB.170 While the budget function requires OMB to wield power to constrain resources that agencies and programs would like to have, the organization and management function is more supportive in nature and calls for the establishment of collaborative working relationships with agency officials that could be jeopardized by budget conflicts.

After weighing these considerations, it appears that with appropriate top-level support, the organization and management function could operate well within OMB, as it did historically in the BOB. As a practical matter, however, and with some notable exceptions, OMB has not been able to prevent budget considerations from seriously undermining the management function. Therefore, the office responsible for organization and management should be a small independent office within the EOP. Traditionally, the influence of the Division of Management and Organization of the BOB rested on its support from the President and organizational knowledge and competence.171 The effectiveness of such an office today similarly will depend on: (1) support from the President for its work; (2) other demands for its services; and (3) the abilities of its leadership and staff.

If such an office existed today, it would greatly add to the President’s capacity to address the critical issues of organization, management, and coordination that have become a national priority with respect to assuring homeland security across all of the agencies and programs of government. This capacity should strengthen the authority of the congressional government affairs committees. Expanded authority and capability among the committees, in turn, is likely to increase the stature of the new office as well. The need for a solid analysis of executive organization and management likely will continue to be strong for quite some time.

B. Improving the Administration of Medicare

One issue concerning the future of Medicare administration is where important economic, demographic, technological, and political external forces will go in the future. The consequences of economic and demographic issues for Medicare’s administration are hard to predict, but increasing healthcare costs and an increasing number of eligible Medicare beneficiaries undoubtedly will lead to major program changes in the future. Eventually, technology may become easier for CMS to apply to the administration of claims processing and other systems. CMS faces a strategic imperative on the technology front-to counter the current downward spiral in confidence in CMS administration, the agency must gain control over the information concerning its program so that it can become accepted, perhaps even respected, as a participant in deliberations over Medicare’s administration and the program’s future.

Assuming that fee-for-service coverage remains a part of Medicare, Gail Wilensky has asked important questions about the politics of Medicare administration: “One question is whether HCFA will be given the power to administer a modernized fee-for-service program. Will Congress allow HCFA the flexibility that will be needed to run such a program and will Congress and the Administration provide HCFA with the resources needed to carry out such a task.”172 Wilensky adds, “History is not encouraging on either of these issues.”173 The voice of beneficiaries on behalf of effective program administration has been missing from the political debate. Only the beneficiaries can provide a political counterweight to the other interests that predominate in making administration of Medicare so difficult. Academics have not highlighted administration of Medicare as a critical issue. Academics also have not highlighted the larger policy issues such as the financing of Medicare and the extent of program coverage.

Will anything actually happen to reverse today’s downward spiral of low confidence and even lower investment in Medicare administration? The lessons from other federal departments and agencies are mixed. To take one example, the U.S. Coast Guard languished for years, attempting to carry out its mission with an obsolescent fleet that was the third oldest of the forty main naval powers in the world.174 Then came September 11, 2001 and a recognition of the importance of the Coast Guard to the well-being of the United States. This recognition led to the greatest infusion of funds that the agency has ever seen and the establishment of a seventeenbillion-dollar program to provide the ships and systems that the agency has long needed.175

Given the strong beneficiary constituency of Medicare and the importance of the program to a large number of people, such a development for CMS is not out of the question. At least as likely, however, is that the status quo of continuing decline will prevail in the future. The example of HUD already has been discussed. The 1994 NAPA report on HUD contained the following recommendation:

The department should be preserved only if it can demonstrate the capacity to manage its resources responsibly, and if the administration, Congress, and HUD can put aside the past to look toward how the department can best help communities meet their needs in a flexible fashion. If, after five years, HUD is not operating under a clear legislative mandate and in an effective, accountable manner, the president and Congress should seriously consider dismantling the department and moving its core programs elsewhere.176

It has been many years since the publication ofthat NAPA report, and HUD continues to operate without a clear legislative mandate and with substantial operational shortcomings in major programs.177 Absent the impact of a calamitous event such as September 11, 2001, administration would seem to be a neglected issue not only for Medicare, but also across much of the rest of the government.

Thomas H. Stanton*

* B. A., University of California at Davis; M.A., Yale University; J.D., Harvard Law School. Thomas H. Stanton is a Washington, D.C. attorney, whose practice relates to the capacity of public institutions to deliver services effectively, with specialties relating to organizational design, federal credit and benefits programs, government enterprises, regulatory oversight, and privatization. Mr. Stanton serves as Chair of the Standing Panel on Executive Organization and Management of the National Academy of Public Administration and is a former member of the federal Senior Executive Service. he served on the Study Panel on Medicare’s Governance and Management of the National Academy of Social Insurance and is a Fellow of the Center for the Study of American Government at Johns Hopkins University, where he teaches the law of public institutions.

The author would like to thank Timothy Stoltzfus Jost, Robert L. Willett Family Professor of Law at Washington and Lee University School of Law, for inviting him to prepare this article as part of the conference on The Future of Medicare, Post Great Society and Post Plus Choice: Legal and Policy Issues. Thanks also to reviewers of early drafts of this paper: David Hyman, Timothy Jost, Kathleen King, Jeffrey Lubbers, Theodore Marmor, and Sallyanne Payton, and to current and past officials of the Centers for Medicare & Medicaid Services and other people who agreed to be interviewed for this work. The author bears sole responsibility for the contents of this paper.

Copyright Washington & Lee University, School of Law Fall 2003

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