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Testimony on The Year 2000 Computer Problems by John Callahan
Assistant Secretary for Management and Budget
and Chief Information Officer
U.S. Department of Health and Human Services

Before the House Committee on Ways and Means, Subcommittee on Oversight
May 7, 1998

Good morning. I am John Callahan, Assistant Secretary of the Department of Health and Human Services for Management and Budget (ASMB) and Chief Information Officer (CIO). I am pleased to appear before this Subcommittee to provide you with a report on the accomplishments of the Department and the challenges faced by the Department in assuring that our systems are Millennium compliant. We will especially emphasize the Year 2000 progress made by HCFA and ACF. I am accompanied today by Gary Christoph, CIO of the Health Care Financing Administration (HCFA), and by Elizabeth James, CIO of the Administration for Children and Families (ACF), and Norm Thompson, Associate Commissioner for Automation and Special Projects in ACF's Office of Child Support Enforcement.


The Secretary, the Deputy Secretary, and I have declared the Year 2000 (Y2K) date issue to be our highest information technology priority. We have already taken several steps, and we will continue to take action, to ensure that all HHS information systems are Year 2000 compliant. We have involved all parts of our organization, including staff with expertise in information systems, budget, human resources, and acquisition management in solving the Year 2000 problem. No matter what else we do and what other initiatives we undertake, we must ensure that our ability to accomplish the Department's mission is not impaired.

For this reason, we have established December 31, 1998 as our internal deadline for Year 2000 compliance of mission critical systems. This was done in order to provide a full year of operations in which to detect and remedy any adverse interactions among HHS systems and those of our many service partners, including other Federal agencies, state and local governments, tribes, and contractors.

To meet our Year 2000 responsibilities, we have taken a series of strong administrative actions. We have established direct reporting lines between staff working on Year 2000 activities and all Operating Division (OPDIV) Chief Information Officers; and each OPDIV CIO is responsible for regular reporting on Y2K efforts directly to the OPDIV head and to me, until Year 2000 date compliance is accomplished.

In our February 1998 quarterly report to the Congress, HHS reported 491 mission critical systems. About 40 percent of these systems are now Year 2000 compliant. We closely monitor progress and maintain a monthly reporting system to track progress on all of our data systems. Our monitoring system prompts remedial action where and when necessary and encourages examination of systems that may be able to be retired, thereby making better use of limited Year 2000 resources. In addition, our OPDIVs have compiled inventories of their system interfaces, and have contacted their interface partners. On April 22, I provided a listing of state interfaces to the National Association of State Information Resources Executives (NASIRE). Because testing, including independent verification and validation (IV&V), is critical to our Year 2000 effort, we are requiring our OPDIVs to subject their systems to stringent testing and IV&V. We also know there is a possibility that, try as we might, some systems may not be fully compliant in time. Therefore, we are requiring the OPDIVs to develop contingency plans that permit business continuity in the event of system failure. These contingency plans will be noted in our next Year 2000 quarterly report.

We are taking action to retain, re-employ, and attract qualified information technology professionals, using both employment and contracting authorities. On March 31, we received Department-wide personnel authorities from the Office of Personnel Management (OPM) to waive the pay and retirement reduction for re-employed military and civilian retirees who return to work on Y2K remediation.

Late last week, the President signed a 1998 supplemental appropriations bill directing $20 million of HCFA contractor funds to be redirected toward HCFA's Year 2000 remediation efforts. While these funds will certainly help, HCFA still must find ways to address the shortfall. We estimate that HCFA will require additional Year 2000 funding in FY 1998 and FY 1999. In FY 1998, HCFA estimates it needs an additional $43 million, and in FY 1999, HCFA may require an additional $60 million for HCFA contractor remediation efforts. For FY 1998, we will soon be sending to Congress a letter notifying you of our intent to use the Secretary's one-percent transfer authority to shift funds from other HHS activities to make the additional $43 million available for HCFA's Y2K efforts. While cutting funding for other activities is never easy, and all may not be happy with our choices for offsets, we would appreciate Congress' support for our effort to give HCFA the resources necessary to address this problem.


Our greatest Year 2000 concern is for HCFA's Medicare program. This program is run by over seventy external contractors, including several shared systems maintainers, who operate and maintain a base of software programs that process 900 million fee-for-service claims payments annually for nearly 33 million Medicare beneficiaries. Nearly one quarter of the external Medicare contractors have not yet completed assessments of their systems. However, under the current law (Title XVIII of the Social Security Act) HCFA has limited authority for addressing the Year 2000 threat to Medicare systems. This situation illustrates why Medicare contracting reform has been and continues to be an Administration priority. There are a number of facets to HCFA's current contracting authority that hinder HCFA's ability to aggressively orchestrate Year 2000 compliance.

Medicare claims processing contract terms are unique and differ in several important respects from typical Federal contracts awarded under Federal Acquisition Regulation. Medicare statutes require HCFA to contract for services with insurance companies only -- not computer or transaction processing firms -- and only on a cost reimbursement basis

Intermediary and carrier contracts provide for automatic renewal on an annual basis. Furthermore, HCFA may terminate a contract only for cause and not for convenience, while contractors may leave the Medicare program with 180 days notice. It generally takes HCFA six to nine months to transfer a contractor's workload to another contractor organization.

Most importantly, because HCFA is required to reimburse its Medicare contractors for all allowable costs, the agency's ability to exert financial leverage over its contractors to direct funds toward such activities as Year 2000 compliance is limited.

HCFA has been proactive in exerting what pressure is possible on the Medicare contractors with regard to Year 2000 compliance. HCFA has proposed amendments to Medicare contracts requiring millennium compliance, and has released guidance that would provide more restrictive definitions of compliance and testing requirements. Nonetheless, we remain greatly concerned about the need for a faster pace of progress by Medicare contractors in meeting our Year 2000 goal.

As I stated earlier, problems surrounding Year 2000 compliance are an illustration of why the Administration has proposed contracting reform legislation. On February 27, 1998, HHS sent a proposal for Medicare contractor reform to Congress. This proposal would amend the Medicare statute regarding HCFA-contractor relations. Our proposal would provide the Secretary with greater flexibility for managing the Medicare program, and allow increased discretion in contracting for claims processing and payment functions. Under this authority, the Secretary could award contracts from a larger pool of qualified contractors. We believe that this change would promote competition and potentially allow the Medicare program to obtain better value for its dollar. The new authority would also be especially helpful in allowing the Secretary to enforce contingency plans that permit business continuity in the event of system failure. This proposal has received the endorsement of John Koskinen, Special Assistant to the President for Year 2000, in testimony before the Senate Governmental Affairs Committee.

The proposal would allow the Secretary to contract for Medicare functions on a best value basis as permitted by the Federal Acquisition Regulations (FAR). It would change Medicare law to permit the Secretary to follow the FAR in administrative contracting. We would then be able to determine on a case-by-case basis the most appropriate contractual arrangements, with fixed price and incentive provisions, for example.

We have requested Medicare contracting reform from Congress for a number of years and recently submitted a proposal with our FY 1999 Budget request. While we understand that, due to uncontrollable variables, no organization can provide an absolute guarantee of end-to-end processing throughout the Millennium change, swift passage of this legislation now will provide HCFA with greater leverage to proactively manage Medicare contractors. We therefore, respectfully request, and encourage, your assistance in securing enactment of this very important proposal.

We recognize that HCFA will continue to face a daunting and exhausting effort that contractor reform alone cannot address. As noted earlier, this will require additional resources to be used for contractor Year 2000 remediation or testing and independent verification and validation. We will especially depend on HCFA's IV&V contractor, who will review both internal and contractor remediation efforts. HCFA's testing contractor will provide independent assurance that Medicare claims processing systems will operate properly in the next Millennium.


ACF has 55 mission critical systems. Of these systems, 12 are compliant, three are being repaired, 38 are being replaced, and two are being retired. ACF processes nearly 7,000 grants per year.

ACF's mission critical systems fall into two major categories. These categories are grants and child support enforcement. Approximately 40 ACF systems award grant funds and track the grants ranking and approval process, as well as tracking financial and program information, for example, how many children are enrolled in a local Head Start program.

Child support enforcement systems include the Federal Parent Locator Service (FPLS), which helps States to find non-custodial parents for purposes of establishing or enforcing child support orders. The FPLS allows the States to search Federal Government data bases for information such as Social Security records and Internal Revenue Service tax information. The FPLS will be compliant by October 1, 1998.

A new system mandated by the Personal Responsibility, and Work Opportunity Reconciliation Act, the New Hires data base, receives and processes information from all employers about newly hired employees. Knowing when an employee is newly hired or changes jobs can provide information that allows States to provide more timely location of absent parents. The New Hires Data Base was developed as a Year 2000 compliant system.

ACF has completed the identification of its data exchanges and has established contact with its data trading partners. Many of ACF's data exchanges are incoming only. Much like the Centers for Disease Control, ACF is relying heavily on electronic bridging to convert non-compliant information, thereby avoiding difficult-to-detect "soft failure" caused by bad data.

In fact, ACF's contingency plans to ensure the continuity of operations, should the need arise, will rely on electronic bridging to exchange information. For example, the Office of Child Support Enforcement systems will use electronic bridges developed as part of the renovation process to allow ACF to successfully exchange and process both compliant and non-compliant data. In addition, ACF's systems for processing grants are being replaced by a Year 2000 compliant client-server system called GATES.

ACF is working closely with its state partners to ensure that the states continue to devote sufficient attention to Year 2000 issues. As noted above, many state systems, including most of the child support enforcement systems, have been developed over the last five years and are Year 2000 compliant. Yet, some older systems, for example in the welfare programs, may need work. ACF will maintain a dialogue with the states, and will provide assistance where necessary


Our Year 2000 related activities are not limited solely to HHS programs alone. On January 21, 1998, Deputy Secretary Kevin Thurm signed a letter, sent to over 16,000 biomedical equipment manufacturers, strongly urging them to identify noncompliant products, and the actions they are taking to ensure compliance. The manufacturers are now responding to this survey developed by my office and the Food and Drug Administration (FDA). The FDA now operates and maintains a public Internet web site listing all biomedical equipment information received from the manufacturers relating to Year 2000 compliance. The web site is operational and FDA is currently posting the manufacturer responses on the Internet.

We are planning additional outreach activities, beyond the biomedical equipment issues, to inform the health and human services community in general about Year 2000 issues. These issues include the potential for Year 2000 problems with facilities equipment, telecommunication products, and commercial off-the-shelf software that runs automated information systems.


HHS still faces substantial challenges in our Year 2000 efforts. However, let me assure you, on behalf of Secretary Shalala and Deputy Secretary Kevin Thurm, that we will continue to vigorously pursue Year 2000 remediation as our most important information technology initiative.

We recognize our obligation to the American people to assure that HHS's programs function properly now and in the next millennium.

I thank the Committee for its interest and oversight on this issue, and would be happy to answer any questions you may have.

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