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Testimony on Medicare Transaction System by Bruce C. Vladeck
Administrator, Health Care Financing Administration
U.S. Department of Health and Human Services

Before the House Committee on Government Reform & Oversight Subcommittee on Human Resources
May 16, 1997


Good morning, Mr. Chairman and Members of the Committee. I am pleased to be here today to discuss with you the Health Care Financing Administration's efforts toward implementation of the Medicare Transaction System (MTS), which will provide a state-of- the-art platform for electronic billing and claims processing to meet the needs of Medicare beneficiaries well into the next century.

Our current claims processing systems are old and do not provide us with the timely information we require as prudent stewards of the Medicare program. Moreover, the 8 operating systems --- with 70 contractors at 34 data centers --- form a cumbersome and inadequate network with no connections between fee-for-service systems and databases and those for managed care. In addition, components of the Common Working File, the primary database for beneficiary and provider information, reside at nine separate sites.

We all agree upon this common goal: Medicare needs to update its information technology capabilities. We believe MTS will provide a single, national integrated information and transaction system that is key to our ability to meet our customer service and fiduciary responsibilities into the 21st century. MTS represents the largest infrastructure change ever undertaken by HCFA, and it is critically important to meeting HCFA's business goals For these reasons, we are committed to the completion of the MTS project.

As envisioned, MTS will be fundamentally an information system with a large payment processing component capable of adapting to changing needs. MTS will integrate Medicare Part A, Part B, and managed care data and increase the standardization of Federal data requirements and payment policy; amplify detection of program fraud; enhance the coordination of insurance benefits so that we can ensure that Medicare pays only when it is supposed to; increase access to electronic data; and provide Medicare beneficiaries and providers with a single point of contact to resolve all program inquiries. This will not be a monolithic computer system but a modular system that will be tested and implemented incrementally in order to reduce risk.

As I mentioned, HCFA's current processing environment links dozens of contractors operating eight different systems to HCFA. The system has evolved into a patchwork of redundant and antiquated systems and interfaces that have developed over the past 30 years, and it is incapable of providing timely and accurate information because no integrated database exists. Therefore, to resolve simple problems, we must frequently access- various databases, including those of our intermediaries and carriers, the Common Working File, SSA's, and HCFA's own internal databases.

It is imperative that we make the transition to a new system as quickly as possible, to continue to serve our Medicare and Medicaid beneficiaries. MTS will provide the capability for timely information retrieval, introduce improved control over the distribution of benefit payments to comply with provisions of the Chief Financial Officer Act, process transactions more efficiently and for less cost, enhance our ability to detect and prevent payments for services that represent fraudulent or abusive billings, and dramatically improve customer service. Most importantly, NITS will have the flexibility to respond to the rapidly changing health care environment because of the modular nature of the system, which can "plug in" or modify functionality as needed.

The development and implementation of NITS, without disrupting service to beneficiaries, is the single largest task HCFA has attempted. When the work on this system began, we did not fully understand the enormity of what we were undertaking. It is an exceedingly complex task. As such, we are currently in the process of reevaluating the implementation design for MTS. As we continue through this reevaluation process, we understand more of the issues and influences and will be better prepared to specify more details. This has implications for scope of work and what the ultimate costs of MTS will be. We welcome assistance from Congress and others as we labor to get the best possible Medicare Transaction System.

Some have asked why we don't simply update our current processing systems and build better interfaces, rather than investing the time and resources to build the MTS. This would be akin to someone with a 15 year old computer, trying to add memory and continue to repair the computer, rather than taking advantage of new technology and buying a state-of-the-art model. The old computer would never be able to do what the new one would, no matter how much memory was added. Similarly, repairing and "updating" our current processing systems will never give us the timely information we require. The important point here is that MTS changes Medicare's focus from paying claims to meeting the needs of our beneficiaries.

The General Accounting Office, among others who have advised us on MTS, has emphasized the importance of HCFA's integrating MTS project management with our current operating business goals. We agree. The challenge for HCFA, as we see it, is not just to design and build a new system, but to do it without increases in staff and without adversely affecting our beneficiaries or their providers of health care while we process over a billion claims per year.

To further complicate this scenario, HCFA's workload has increased as we have addressed critical operational issues. These include replacing the unanticipatedly large number of Medicare contractors deciding to leave the program due to their own business interests, implementing new initiatives to address program integrity such as Operation Restore Trust and the Medicare Integrity Program, and coping with changes needed as more and more beneficiaries enroll in managed care organizations.

Let's look at this from a different perspective. If HCFA were to do nothing --- and stay with our current systems --- we would still spend over approximately $20 billion over the next 10 years processing claims and at least another $1 billion in maintaining current systems. And that doesn't account for the as yet unknown changes that will certainly occur in the Medicare program, in the health care industry and in insurance markets. Further, at the end of that period we would have to face the reality that current methods of processing transactions and information are simply not adequate to serve our beneficiaries and providers, nor are they capable of providing the nation's health policy makers the timely and relevant information necessary to make informed decisions on critical public policy issues.


Although we are steadfast in our belief that HCFA must make the changes in information technology represented in the MTS initiative, we admit the task is more complex than originally contemplated. For example, it took us some time to understand how best to identify the type and level of system requirements necessary for MTS. We have learned a great deal in the last 3 years about ways to improve the management of complicated technology projects, and GAO and others have been of significant assistance in offering suggestions for improved management.

We have benefitted significantly from outside oversight of the MTS project. The recommendations we received have often affirmed our internal decisions. For example, we revamped our approach to MTS to support the software development in multiple phases or releases. This breaks the project down into more manageable segments of work, reduces risk, and allows for an incremental implementation of successive pieces of MTS. This approach also permits a more thorough testing of each MTS component to work out the bugs before implementation of the next piece of the system. Compared to a "big bang" approach, where all pieces start simultaneously on day one of MTS, incremental implementation of MTS is a more prudent approach.

Because we recognized that we did not have the all the expertise we needed internally, HCFA sought contractual assistance early on from top-notch management consultants on critical project issues, including managing risk; consolidating and integrating systems; timing and scheduling of project phases; building, using and testing hardware and software; planning transitions; and utilizing resources. We also have received invaluable advice from our independent verification and validation contractor. With help from all of these sources, we recognized the need for flexibility as we reassess contractor.

With help from all of these sources, we recognized the need for flexibility as we reassess our MTS development strategy.

Last fall we modified the contract of our software developer, GTE, to add work to clarify the role of managed care in the MTS. Unlike fee-for-service claims, which are paid by our contractors, HCFA pays Medicare HMOs directly, using an in-house system that is more than ten years old and inadequate to meet its growing workload.

The increasing trend towards managed care is an important factor in Medicare's future, but it is also an immediate business need in serving a growing number beneficiaries and health care plans. The managed care piece of the system is so important to HCFA that we gave it priority as the first release to be provided by GTE.

No project of the complexity of NITS can be accomplished without difficulties. We recognized the need to build processes to better ensure early disclosure of marginal performance. During the contract renegotiation last summer, GTE agreed to the inclusion of performance metrics to measure their progress in accomplishing project tasks. In March, our evaluation of the performance measures indicated that GTE was slipping increasingly behind schedule, with the consequent potential for significant cost overruns. Our decision to stop work on all areas of the contract, other than managed care, and to reassess our NITS development strategy are examples of aggressive project management and our willingness to intercede.


We announced our decision to reassess our MTS strategy on April 4. HCFA has set a timetable of no more than 90 days from that date to review contingencies and develop plans for the future. During this period, we are continuing to monitor GTE's work on the managed care module very closely. GTE's efforts are progressing from developing more detailed systems requirements to coding and testing , and HCFA already has performance measures in place to assess this phase of activity to ensure that GTE meets time, schedule, and quality goals. By the end of the 90-day period, we will decide what GTE's future role will be in the MTS project. We are also working with a group of Federal employees who are expert in systems design and project management. 'This group, the Information Technology Resources Board or ITRB, is assisting us in reassessing the MTS design and implementation.

In addition, we are evaluating other alternatives for moving forward with MTS, considering more incremental development approaches and different partnering arrangements, examining their technical feasibility, relative strengths and potential risks. We will incorporate an examination of the return on investment as part of our analysis. This does not mean that our vision for MTS is changing. To achieve our shared goals, MTS must still provide the integrated databases needed to strengthen payment safeguards, comply with the Chief Financial Officer Act, improve customer service, and achieve administrative efficiencies. No later than the beginning of July, we expect to have a plan and strategy for moving ahead with MTS.


In the meantime, HCFA is continuing to work on activities that are critical to moving forward with MT S and to help Medicare fiscal intermediaries transition to a single part A claims processing system. In fact, we have completed the transition of all intermediaries on one of the old software systems to the new standard system. We have a schedule for the remaining Part A transitions and will begin transitions from a second old system this month. HCFA recently awarded a contract for the single part B system and is currently planning for the transition of Medicare carriers to this new system to begin shortly.

Over the last 3 years, we have gained extensive experience in transitions as we replaced contractors that left the program. We are now able to make these transitions smoothly and successfully. We are also working under an interagency agreement with Los Alamos National Laboratories to model the best approach to transitions given the resources available.


HCFA is also preparing for systems changes that are necessary for the year 2000. Changes have already been accomplished in critical areas that required urgent attention. With or without MTS, HCFA will be fully prepared to process payments on January 1, 2000. HCFA's Millennium Team has assessed the risk to current systems and prioritized action that needs to be taken. A specific workgroup is addressing technical issues such as standards, algorithms, bridge software and coordination among Medicare contractors, standard system maintainers, external users, and data suppliers.

Beginning two years ago, additional funding was provided to Medicare contractors for necessary system changes to be able to continue uninterrupted claims processing. HCFA has also designed a data collection system to track changes being made and assist in coordinating millennium changes between systems. Our regional offices are coordinating and overseeing the millennium effort for our contractors in the field.


Finally, I want to address the cost of the MTS initiative. There has been much discussion of what the total cost of MTS will be and when those dollars will be spent. Unfortunately, each discussion has focused on different "slices" of the costs, estimated at different points in time. Before discussing the numbers, I would like to stress the complexity of the MTS cost analysis, which includes the cost of maintaining and continuing to operate an existing system while building a new one around it.

Both GAO and HCFA estimate that the total cost of implementing the MTS will be nearly $1 billion over ten years. This estimate could change based on our new design approach. In addition to the design and development costs for the project, this estimate includes the cost of moving from the current environment in which 8 processing systems operate independently, to a single processing system each for Part A and Part B, before moving to the new MTS structure. And the cost of a year of claims processing with the new MTS software is also a part of the investment. As we settled on the design for the MTS, and as the scope of the project has become clearer, we have refined our estimates to include this total project effort over the next 10 years. When we complete our evaluation of alternative MTS implementation strategies, we will he able to estimate the cost to complete the project, and provide a model that projects the out year NITS investment.

Let me provide the cost of MT S development to date. As of March 31, 1997, we had incurred costs of $43.4 million -- $38.7 million for GTE's work, and an additional $4.8 million on independent evaluation of GTE's progress, support in testing software, and systems integration. (A total of approximately $110 million has been obligated for these contracts so far.)

The $38.7 million for GTE's work has not been wasted. There have been substantial gains from the GTE software development effort. GTE has completed fully-developed systems specifications for handling managed care payment processes as well as enrollments and disenrollments, a high-level systems design, an operating systems infrastructure, a solution for data security, as well as an analysis for the functional requirements for Phase I of the MTS system. If we were to terminate the contract, HCFA would own the products and benefit from the analysis and development already completed.

HCFA's in-house personnel, travel, and education costs for NITS for fiscal year FY 1996 were $6.4 million and for FY 1997 were estimated at $7.9 million, less than one percent of HCFA's yearly administrative costs. The reassessment of our MTS strategy could affect future in-house costs, a factor which we will consider as we review alternatives.

In addition, we have spent $7.9 million in FY 1996 to convert workload to the standard Part A system. We project that we will spend an additional $62.3 million in FY 1997 for conversions to the single Part A and Part B systems.

The President's FY 1998 Budget requested $89 million for MTS. The bulk of this would be spent on continuing to transition contractors to single Part A and Part B systems. The remainder will be spent on the test facility and independent verification and validation activities.

GAO has used the 1992 estimate that HCFA prepared for a GSA procurement delegation to assert that the cost of the MTS program has increased eightfold --- from $151 million in 1992 to $1 billion in 1997. I would like to speak to that comparison. We agree that estimates need to be constantly refined and compared, however, we consider comparison of the 1992 estimate to the present to be like comparing apples and oranges. The estimate of $151 million was a beginning best guess to get the project underway. At that stage, it was not possible to price a systems strategy that had not yet been developed or selected nor did it include risk mitigation efforts that were initiated later as the complexity of the project became more clear. For example, one of the biggest cost drivers is the transition strategy to single Part A and Part B processing systems; however, this strategy is also one of the best means of risk mitigation. This transition strategy, which was not part of the original MTS strategy, has been estimated at over $350 million over 10 years. The cost of obtaining data processing capacity for MTS was also not included in our FY 1992 estimates.


For the last two years, the MTS project has been the subject of intensive oversight - not only from the General Accounting Office and Congress, but from other Federal agencies and private industry. As you know, recently enacted legislation gives the Department's Chief Information Officer specific oversight responsibilities. The oversight of the MTS project involved not only HCFA, but also our contractors working on the MTS project and the Medicare contractors currently processing Medicare claims.

The very clear and consistent message from this oversight was the absolute necessity of avoiding budgetary risks. We are acutely aware of the public responsibility inherent in the investment of public funds, and that is, in part, what drives the MTS project. Our preliminary return on investment analysis shows that unless HCFA's systems are modernized, the public will continue to pay more than necessary for the administration of Medicare, and program payments will continue to exceed what is necessary and reasonable.

I am fully aware of the need to constrain Federal spending. The President has put forth a proposal to balance the federal budget in 2002 that would reduce the growth of spending in Medicare. Currently, we spend more than $500 million per day on services for beneficiaries. At this point in the MTS project, while we must focus on minimizing budget risk, we must not compromise our ability to minimize program risk. We must move forward with confidence that we have invested adequately to get the job done right.

We need to keep these considerations in mind as we continue to reassess our MTS development strategy. The safest course, in terms of minimizing budgetary risk, may not be the most prudent. Risks associated with the MTS development process must be weighted against the very significant potential gains.

When you come right down to it, MTS is an enormous undertaking, it's extremely complicated and not without risk. But this is true of all systems projects of this nature. The important point is that risk can be managed and mitigated, and we believe HCFA, with all the appropriate assistance and oversight of others, has demonstrated its ability to do that.

The bottom fine is that the MTS vision is the right vision for the Medicare program. To do other than continue with MTS development would be to renege on our obligations to our beneficiaries and the nations's taxpayers. And we would be sorely tried to meet future challenges inherent in our rapidly changing health care environment. We need to do more, we need to do it better, and we need to do it faster. We need to seize this opportunity to build on past experience, invest the dollars realistically necessary to develop and implement the system, and take the risk - albeit wisely and with reasonable plans to ensure success.

I look for your support as we move forward with this critical project. Your concerns, suggestions, and assistance are all welcome expressions of our need to work in partnership to see the MTS project through to a successful conclusion.

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