Statement by
Thomas A. Scully
Administrator, Centers for Medicare & Medicaid Services
Medicare Regulatory and Contracting Reform
before the
House Ways & Means Subcommittee on Health

February 13, 2003

Chairman Johnson, Congressman Stark, distinguished Subcommittee members, thank you for inviting me to discuss Medicare regulatory and contracting reform. We all want to improve our ability to serve our nation's elderly and disabled, and I want to thank you for your continued interest in increasing the efficiency and quality of the Medicare program. Over the past two years, I have appreciated your support of our efforts to eliminate unnecessary regulatory burdens and improve contractor oversight at the Centers for Medicare & Medicaid Services (CMS). I applaud your commitment to these important issues. Building on these efforts, there is now a clear opportunity to improve Medicare even further in this legislative session.

As you know, strengthening and improving the Medicare program remains one of the Administration's top priorities. Additionally, the Administration remains committed to updating and streamlining Medicare's regulations and administrative procedures to reduce the time devoted to paperwork and encourage high-quality health care for all seniors. The Secretary's Advisory Committee on Regulatory Reform, which my fellow witness today, Dr. Wood, chaired and for which he traveled all over the country, heard from patients and providers about the Department's regulations and opportunities to improve them. I would like to personally thank Dr. Wood for his hours of work chairing the Committee, as well as his service on the Practicing Physicians Advisory Council (PPAC). Even before this report was complete, we had begun working on many of the changes the Committee recommended. These recommendations, along with a host of other efforts within CMS and the Department, have led to great strides in making CMS a better business partner and in making Medicare a more efficient program. We are reviewing all of the Committee's recommendations to identify those that can be implemented quickly, and those that will require more significant development and resources.

In some cases, reform requires legislation. H.R. 3391, the Medicare Regulatory and Contracting Reform Act, includes reforms that are vital to streamlining Medicare's administrative processes and reducing regulatory burden. While we do have some concerns with this legislation, most of them are largely technical in nature and we look forward to working with you and your staff to resolve them quickly.


First, I want to take this opportunity to convey my gratitude for Dr. Wood and the members of the Secretary's Advisory Committee on Regulatory Reform that developed more than 250 specific recommendations, a majority of which pertain to CMS. President Bush, Secretary Thompson, Assistant Secretary for Planning and Evaluation Bobby Jindal and I share the view that, in an effort to protect public health and safety, federal regulations must be crafted to ensure access to high quality health care. The Secretary asked Bobby Jindal to lead the initiative and established a steering committee on which other HHS officials and I participated to provide guidance and direction to an ongoing review of HHS regulations. We are addressing a significant portion of the Committee's report by reducing the burden of inefficient, as well as unnecessarily complex and confusing regulations. As you know, we have already implemented recommendations made by the Committee that will reduce the burden of data collection on beneficiaries and providers. These are common-sense solutions to ensure that health care professionals can spend more time with patients and less time with paperwork. For example:

  • Medicare reduced the frequency that hospitals must gather detailed information from Medicare beneficiaries about other insurance. Hospitals will now be able to gather this Medicare Secondary Payer information - used to make sure the correct insurer pays each health care claim - once every 90 days. This change means hospitals will not have to ask patients repeatedly for the same data.
  • We have launched a new effort to streamline Medicare's paperwork requirements for home health nurses and therapists so that they can focus more on providing quality care to their patients. The Outcomes and Assessment Information Set (OASIS) requirements were reduced by approximately 27 percent, and these changes will streamline Medicare's home health patient assessment requirements to include only those elements needed to promote quality of care and to ensure proper payment.
  • Medicare has streamlined its paperwork requirements for nurses and other clinical staff caring for Medicare beneficiaries in nursing homes. While certain longer assessments are still required, nursing homes caring for Medicare beneficiaries can now use a shorter assessment form to gather information needed to pay Medicare claims. The change cuts the time it takes to complete the assessment form from 90 minutes to 45 minutes, while continuing to collect data needed to measure quality of care in nursing homes.

I also want to mention, in addition to the Secretary's Advisory Committee, we have been inviting nursing homes, home health agencies, physicians, hospitals, other providers, and beneficiaries to participate in "Open Door Forums" to discuss their ideas for simplifying Medicare regulations. We have had 135 of these meetings, with more than two thousand in-person participants and over eleven thousand participants on our toll-free call-in lines. We have been able to make many improvements based on their concerns, as well as based on other activities that we are pursuing. Most importantly, it has helped change the image of CMS as an "impenetrable bureaucracy."


Clearly, we have worked diligently toward eliminating unnecessary regulatory burdens in Medicare and improving our management of the private-sector contractors that process and pay Medicare claims. We need to make the Medicare contracting system more consistent with standard federal government contracting procedures, which are typically governed by the Federal Acquisition Regulation (FAR). The President's FY2004 budget includes provisions to implement Medicare appeals reform, to continue pursuing contracting reform, to address provider education, and for program integrity efforts to ensure that the Medicare program pays appropriately for covered services. We remain committed to these activities - they are integral to strengthening and improving the Medicare program so we can better serve America's seniors and disabled citizens.

While H.R. 3391 addresses many important issues that respond to the concerns of our partners, in a number of these areas, we believe that some of the proposed legislative changes have been overtaken by our current administrative practices, and could prove duplicative or counterproductive. In addition, codifying these areas could prevent CMS from administratively making further improvements in the future - by reducing management flexibilities and constraining our ability to manage taxpayer dollars as efficiently as possible.


One area where we have concerns with the legislation is in Medicare appeals. As required by law, we provide a multi-level process for Medicare beneficiaries, providers, and suppliers to appeal when they disagree with a Medicare contractor's decision to deny Medicare claims for items or services. We recognize the need to make this process more efficient and accurate. As I speak, we are working aggressively to implement the Medicare appeals reform as required by the Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 (BIPA). The President's budget includes a request for funding to cover implementation costs. We are proceeding toward the transfer to CMS of the Medicare hearing function currently performed by the Administrative Law Judges (ALJ) in the Social Security Administration (SSA). We have already had extensive discussions with SSA to explore administratively transferring the Medicare hearing function to CMS.

There are several technical areas that we consider priorities in making the BIPA appeals provisions more efficient. We are moving forward and have published Notices of Proposed Rulemaking on both sections 521 and 522. However, we are concerned that the current BIPA section 521 timeframes for decision-making at each level of the appeals process are not viable. Extending these timeframes for review at each appellate level would create a more workable timetable and would reduce the number of cases that proceed to higher and more costly levels of adjudication. Specifically, I would recommend that the timeframes at the contractor level should remain at 45 days for Medicare Part B reviews and 90 days for Medicare Part A reconsiderations. In addition, the timeframes might be extended to 60 days at the qualified independent contractor (QIC) level and to 180 days at both the ALJ and Departmental Appeals Board levels. Finally, we have asked for consideration of legislation that would reduce the current number of QICs from 12 to "not fewer than 4." This number would do the job, but be far more efficient and faster to implement. If needed, the Secretary could add more QICs in the future.

We truly need to implement sections 521 and 522 and, with your support, we expect to make great headway this year.


In addition to improving the appeals process, we are committed to reducing regulatory burden on providers so that they can spend more time taking care of patients and less time filling out unnecessary paperwork. As I mentioned, we have already undertaken numerous actions to reduce burden and streamline administrative processes. For instance, in October 2001, we began publishing regulations on the fourth Friday of every month (except in cases where a statutory deadline or extenuating circumstances demand otherwise), and we began issuing a quarterly publication that I am extremely proud of, called the Quarterly Provider Update. It lists all the regulations that CMS plans to publish in the coming quarter, as well as the publication date and page reference to all regulations published in the previous quarter. The Quarterly Provider Update is available on the CMS website with links to the complete text of published regulations. One year later, on October 1, 2002, we implemented a "subscriber service" that allows the public to receive automatic updates to the Quarterly Provider Update. Less than five months later, we have nearly five thousand subscribers, and that number grows daily. Now, instead of providers hiring regulatory experts to comb through thousands of pages of the Federal Register every day, they can simply subscribe and receive updates as they occur.

We are committed to both of these endeavors - they are integral to providing our partners the information they need to serve seniors and disabled citizens. Of course, some regulations have statutorily imposed publication dates or other extenuating circumstances that do not lend themselves to a one-day-a-month publication schedule, but the bulk of our activities have been simplified. We believe this flexibility is critical. In addition, we also are including in the Quarterly Provider Update all program memoranda, manual changes, and any other instruction that could affect providers in any way. All of these instructions are included one quarter prior to their effective date to allow providers time to react before new requirements are placed on them. Since we have already taken administrative steps to streamline this part of the regulatory process and be more accountable to beneficiaries, providers, and the public, such provisions do not need to be included in legislation.

Provider Education

Another integral part of our regulatory reform efforts is our work to improve performance through provider education and outreach. We have expanded our Local Provider Education and Training program (LPET). This year we doubled funding for LPET, which is targeted to respond to problems identified through the review of claims. Providers are receiving more education related to their claims submission. Clinicians deliver most of the education, and respond to specific coverage or coding issues. Contractors meet with providers in group settings, individually, or communicate using the Internet. As a result, our contacts with the provider community are more collaborative and productive.

In another step to address provider education, H.R. 3391 would require contractors to provide general written responses to specific provider and supplier billing and cost reporting questions within 45 business days of receipt of inquiries. I take some pride in reporting to you that since May 2000, CMS contractors have been required to do this, and so it need not be included in legislation.

Comprehensive Error Rate Testing

H.R. 3391 would also require the Secretary to develop a methodology to assess the specific claims payment error rate of contractors. However, we currently have a practice in place to assess specific claims payment error rates of contractors, and to codify a procedure might limit our flexibility to make further improvements in the future. We developed the Comprehensive Error Rate Testing (CERT) program to improve the processing and medical decision making involved with payment of Medicare claims. The CERT program, which began in August 2000, will produce national, contractor, provider-type and benefit category specific paid claims error rates. Unlike the former improper payment calculation, the CERT program will allow CMS to estimate specific error rates for individual contractors, providers and benefits. The new information will continue to be aggregated to produce national level estimates like those calculated by the Office of the Inspector General (OIG), but with much greater precision, because so many more claims will be reviewed. The CERT system will examine 24 times more claims than the current process has been able to review. This will give us greater ability to see how well the Medicare contractors are performing and allow us to pinpoint problems, fix them, and ensure that our rules are being followed. Our intention has been and will continue to be that the Medicare Trust Funds benefit from improved claims accuracy and payment processes.

Review, Recovery and Enforcement

Regarding review, recovery and enforcement, I am also happy to report that in many of the instances to follow, we are already performing to the intent of your legislative provisions.

For example, H.R. 3391 would prohibit random prepayment review, except to develop a contractor-wide or program-wide claims payment error rate, or under additional circumstances that may be provided under regulation. Currently, we only use random prepayment review to develop contractor-wide or program-wide claims payment error rates. However, this important tool may offer other benefits to the Medicare program in the future and we believe that the flexibility to determine the appropriate use of random review is integral to managing our programs effectively.

Also included in H.R. 3391, is a provision stating that contractors may not initiate non-random prepayment review of a provider based on the initial identification by that provider of an improper billing practice - unless there is a likelihood of sustained or high level of payment error. Currently, the only time CMS contractors initiate non-random prepayment review is when there is a high level of payment error or the documented educational interventions have failed to correct the problem. Our contractors perform the medical review through a process called Progressive Corrective Action. In this process, contractors perform data analysis to determine whether patterns of provider claims submission and payment indicate potential problems. If through data analysis a potential problem is detected, a contractor may perform a "probe" sample. Only when the probe review reveals that there is a major error will a contractor perform high level prepayment review.

In fact, in a recent study, the General Accounting Office examined three Medicare carriers and determined that the Progressive Corrective Action policy has reduced medical reviews of claims and has increased carrier education to individual physicians. According to the report, 90 percent of physician practices had no claims selected for complex medical review by carriers. For the few practices that were reviewed, typically the carriers requested documentation to support no more than two claims for the year.

Additionally, under our Progressive Corrective Action policy, we currently perform several activities that are included in provisions in H.R. 3391. First, when a contractor audits a provider or supplier, under H.R. 3391, the contractor would be required to:

  • Give the provider and supplier an opportunity to provide additional information and take into account information provided on a timely basis;
  • Give the provider or supplier a full review and explanation of the findings of the audit; and Inform the provider or supplier of their appeal rights.

Second, H.R. 3391 would require the Secretary to establish a standard methodology for Medicare contractors to use in selecting a sample of claims for review in the case of an abnormal billing pattern. Both activities are current practice under our Progressive Corrective Action policy, and do not need to be included in legislation.

Contracting Reform

As you know, the Administration's primary goals for Medicare contracting reform include providing CMS with more flexibility to adapt its business model to meet the evolving needs of the Medicare program and bringing competitive discipline to the world of Medicare administrative contracting. We also believe that contracting reform will provide opportunities to improve communication between CMS, contractors and providers, and will promote our ability to reward contractors that perform in an excellent manner. I want to thank this Committee for its sustained interest in and support for Medicare contracting reform.

We have been working to consolidate contractor functions for some time. When I went to OMB in 1989, we had well more than 100 fiscal intermediary and carrier contracts and our target was to get that to ten. Thirteen years later, I came to CMS and there were still more than 50 separate intermediary and carrier contracts. Over the past decade, we have seen a substantial consolidation in the number of these contractors, so that, at present, we are at 46 and counting: Medicare claims are processed by 27 fiscal intermediaries (4 of which also specialize in the handling of home health and hospice bills) and 19 carriers (4 of which specialize in the handling of DME claims). My goal is to find the best contractors, incentivize them appropriately, and work with about 20 to 25 who are in it for the long haul.

While H.R. 3391 certainly addresses many important contracting reform issues, I have several additional suggestions I would like to present to you regarding certain policy and technical details. We would be pleased to work with you and your staff on these issues.

For example, the legislation prescribes definite time periods for re-competition of Medicare administrative contracts - every 5 years, provided that the contractor has met or exceeded all applicable performance requirements. We are concerned that these contract period limitations may be too short in some circumstances.

Currently, Medicare contractors are reimbursed for their claims processing and benefit administration activities on a cost-reimbursement basis, which leaves little financial incentive for the contractors to excel in their performance. This is not realistic in today's business environment, given the magnitude of these contracts. The contracting reform legislation would provide us with the ability to address this issue on a broad scale.

Moreover, we are moving forward to test the effectiveness of performance-based payment mechanisms for Medicare contractors on a pilot basis under current law. For fiscal year 2003, for example, we are using a demonstration authority to conduct performance-based contracting pilots with three significant Medicare contractors: CIGNA, UGS and Palmetto. If these efforts prove successful in defining outcomes and achieving some efficiencies, the demonstration could be expanded to include additional Medicare contractors. In addition, we have effectively implemented contracting reform as part of the Medicare Integrity Program. All Program Safeguard Contractors are under performance-based contracts containing award fee plans. These endeavors will give the Agency valuable experience in applying new contracting tools that will become broadly available under HR. 3391.


From my experiences in the hospital sector and in health care generally, I know how important it is that Medicare work more efficiently, and that its regulations be less burdensome. Time and again, this Administration has confirmed its commitment to regulatory and contracting reform. I want to thank you for your unflagging efforts to pursuing these reforms and for your interest in increasing the efficiency of the Medicare program. Improvements in our efficiency result in improvements and speed in paying providers for treating their patients, our Medicare beneficiaries. We have already made great strides in this area, and we strongly encourage your legislative efforts to that end while allowing us to retain the flexibility to continue improving administratively. We look forward to working with you, Chairman Johnson, Mr. Stark and this Subcommittee, to enact needed reforms as soon as possible. We owe it to Medicare beneficiaries and all of Medicare's partners - providers, contractors, and others, to achieve these reforms. Thank you for the opportunity to discuss this important topic with you today. I look forward to answering your questions.

Last Revised: February 14, 2003