Healing HCFA

But Scully is hardly inconspicuous. Committee chairman Michael Bilirakis, R-Fla., acknowledges his presence. People leaving the hearing early walk by, tap him on the shoulder and whisper in his ear. A few hand over their business cards. Some pesky reporters try to make eye contact, hoping to steal away for a few seconds and get that juicy quote. Like everyone else in the room, Scully is at the May 10 joint hearing of two House subcommittees to hear four former administrators of the Health Care Financing Administration explain what's wrong with the agency: too much work, not enough money, an antiquated computer system, lax oversight of contractors, poor communication with outside stakeholders. Scully listens intently. He jots an occasional note. The insights will come in handy as he prepares to take the reins of the much-maligned agency. In late May, Scully was confirmed as the new HCFA administrator.

Fixing the problems is no small task. With a $354 billion annual budget, HCFA is larger than most Cabinet departments. The agency's budget could exceed $700 billion annually by 2010, according to Lynn Etheredge, a health care consultant in Chevy Chase, Md. Etheredge ran the Office of Management and Budget's health care branch in the 1970s and early 1980s. HCFA runs two of the federal government's largest and most important social welfare programs-Medicare and Medicaid. Providing health insurance to more than 39 million seniors, Medicare will cost the federal government $242 billion in fiscal 2001, $237 billion of which will be paid out in benefits. Medicaid covers 34.3 million low-income people. While administered mostly at the state level, federal outlays for the program total $128 billion.

The agency manages more than 260 private health care plans participating in Medicare's managed care program. It also oversees 50 contractors-known as carriers and fiscal intermediaries-who are the direct link between Medicare and health care providers. The contractors process nearly 900 million Medicare claims annually. Yet HCFA has a difficult time ensuring that the contractors are paying providers appropriately. In fiscal 2000, improper payments totaled $11.9 billion, or about 6.8 percent of fee-for-service Medicare payments. The errors stem from fraud and billing mistakes.

Scully is well aware of the agency's weaknesses. During the previous Bush administration, he oversaw the agency's budget while serving at OMB as deputy assistant to the President and counselor to the director. Then he spent two years as a health care attorney for the high-powered Washington law firm Patton Boggs. For the past five years, Scully was president of the Federation of American Hospitals, a trade association representing 1,700 for-profit hospital companies. He also served on the boards of Oxford Health Plans of Trumbull, Conn., and DaVita Inc., a dialysis firm in Torrance, Calif. "Tom is a person with uncommon common sense," says Nancy-Ann DeParle, HCFA administrator from 1997 to 2000. "He has a very good understanding of how to work with people and how to motivate them. Knowing how the hospital industry works will provide him with great insight."

That insight will no doubt come in handy as Scully tries to retool HCFA. Nonetheless, he's bound to get plenty of advice and hear lots of criticism of his new agency. People love to hate HCFA and love to say why. Health care providers and insurance companies despise the agency's bureaucratic maze and feel overwhelmed by its never-ending demands for data and paperwork. The pace at which HCFA approves waivers frustrates state health officials. Beneficiary groups complain that the agency does a poor job of educating seniors about their options. Free-market advocates worry that the agency hasn't done enough to promote Medicare's managed care program. In recent years, the drumbeat of criticism has culminated in members of Congress calling agency officials to the Hill for round after round of HCFA bashing. At the same time, the same stakeholder groups that attack HCFA also have reason to favor the status quo: The slightest change in HCFA's operations could affect their ability to influence policy-making.

From Detractor to Defender

One of HCFA's harshest critics for the past decade, Health and Human Services Secretary Tommy Thompson, is now squarely in the agency's corner. Thompson was quick to condemn HCFA when he was governor of Wisconsin, but now he is pushing for the agency to get more resources. "HCFA has been tasked with implementing several pieces of major legislation and its responsibilities have grown more complex with each new major health care law or budget reconciliation," he told the House Energy and Commerce Health Subcommittee in April.

In the past six years, five laws-the 1996 welfare reform act, the 1996 Health Insurance Portability and Accountability Act, the 1997 Balanced Budget Act, the 1999 Balanced Budget Refinement Act and the 2000 Benefits Improvement and Protection Act-forced the agency to implement more than 700 new provisions. The Balanced Budget Act alone mandated 335 changes to the Medicare program. Thompson says Congress failed to provide enough resources to implement the changes. And he should know.

The HHS Secretary spent an entire week in early May running HCFA out of its Baltimore, Md., headquarters to see firsthand the challenges the agency faces. "The biggest thing I learned? That the employees here are ready for change," Thompson told Government Executive after a May 4 town hall meeting with beneficiaries and HCFA employees. "They've been criticized so much for not having any new ideas. Well, they are coming up with ideas on how to make the agency run better." Concerned about HCFA's ability to perform, Thompson won approval for a 5 percent, $109 million, funding increase to cover the agency's administrative costs in the Bush administration's fiscal 2002 budget request. The added resources are greatly needed, says DeParle. She notes that during 1998, the peak year of implementing provisions under the Balanced Budget Act, the agency had 3,942 full-time equivalent employees, compared with 4,961 in 1980. Just 1 percent of HCFA's budget goes to administrative costs.

Members of Congress are taking notice as well. At a series of hearings this spring, both Democrats and Republicans supported Thompson's call for a budget boost. "As it is now, we want HCFA to run on a hope and a prayer," Rep. Sherrod Brown, D-Ohio, said at the May 10 hearing. But members won't just throw money at the agency. They are calling for substantial management changes.

On May 15, leaders of the House Ways and Means Subcommittee on Health sent Thompson more than 50 proposals for reforming HCFA and Medicare. Among other proposals, they recommended that HCFA should: ä Create a position at headquarters with direct oversight of the agency's 10 regional offices to ensure consistent interpretation of rules.

• Work more closely with health care providers to interpret regulations.
• Issue regulatory announcements every six months instead of randomly releasing new guidance and program memorandums.
• Adopt best business practices for improving contractor oversight.

Scully and Thompson have their own ideas on how to revitalize the agency. For starters, they want to change the name. Thompson proposes the Medicare and Medicaid Agency, or MAMA. He initially raised the idea in jest, but is now very matter-of-fact about the subject. "I'm going to change the name," he says.

"HCFA has no particular meaning," Scully adds during an interview with Government Executive. "No one knows what HCFA is. It doesn't really stand for anything. Everyone knows Medicare and Medicaid. For whatever reason, HCFA has a bad connotation on the Hill. If you are trying to get a clean start, changing the name is not a bad idea."

There are more substantive plans as well. Chief among them is turning the agency from one that looks for ways to say 'no' to one that finds a way of saying 'yes,' says Thompson. The culture change means altering the way HCFA interacts with outside stakeholders. Scully wants HCFA to work more closely with beneficiaries and providers. He wants to create an organization that harnesses the free market to drive insurance choices and quality of care. For starters, he says, the agency can do a better job of educating beneficiaries about their choices and promoting Medicare's managed care program, Medicare+Choice.

Congress created a Medicare managed care program in 1985 in the hope that health maintenance organizations would provide more benefits and do a better job of controlling costs than the traditional, fee-for-service Medicare plan. Under the fee-for-service program, beneficiaries can go to any health care provider that accepts Medicare. But many beneficiaries also must get additional insurance, called Medigap, to help pay for costs not covered by Medicare. Through HMOs, beneficiaries pay a higher premium but have access to a wider array of services, including prescription drugs. The program was expanded in 1997 to include other forms of managed care, including preferred provider organizations, provider-sponsored organizations and private, fee-for-service plans. Medicare+Choice was intended to mimic the level of insurance being offered in the private sector.

Initial hopes for the expanded managed care program were high. In 1997, the Congressional Budget Office predicted 27 percent of seniors would be in a managed care plan by 2002. As of May 1 this year, 15 percent of seniors were enrolled. Between 1998 and 2000, more than 150 health plans left the program or pulled out of various regions, forcing nearly 1 million beneficiaries to find new health plans or switch back to traditional Medicare. The plans complain that the government's reimbursement rates are too low.

"One of the President's intentions and a goal of members of Congress is to revitalize Medicare+Choice," Scully says. "My goal is to find ways to lower the regulatory burden on private health plans and get more of them to stay and be happier in the program."

That may be easier said than done. During the past three years, HCFA has had difficulty implementing key provisions of the Medicare+Choice program and collecting performance data on health plans. The problem largely stems from the fact that HCFA employees have little experience dealing with managed care organizations, says an official with the HHS inspector general's office who asked not to be named.

Reorganize and Reach Out

Still, Scully is optimistic that the agency can improve its track record. His goal is to have managed care enrollment reach 25 percent within three years. To do that, he plans to realign agency functions. HCFA is currently organized into three centers: Medicaid and State Operations, Health Plans and Providers and Beneficiary Services. Scully says he will combine health plans with beneficiary outreach. Eventually, he says, Congress should create a separate agency to run the managed care program, because health plans compete with traditional Medicare for beneficiaries. "The market regulators should not be the same people running the fee-for-service program," Scully says.

Talk of realignment is not welcome news to HCFA employees, many of whom are still trying to find their way after the last agency shake-up. In 1997, then-administrator Bruce Vladeck implemented a wholesale reorganization. He created the three centers, doing away with an old stovepipe structure in which policy and program personnel rarely talked to each other. In its place,Vladeck left a matrix organization where multiple disciplines work together.

The reorganization caused a great deal of disruption, says Joe Flynn, vice president of American Federation of Government Employees Local 1923, which represents HCFA's 3,000-plus bargaining unit employees. It created a disconnect between management and rank-and-file workers, says one HCFA employee.

Scully says he has no intention of "recre-ating the agency and causing chaos." Employees are taking a wait-and-see attitude.

Scully also wants to improve relations with the regulated community-hospitals, doctors, nursing homes, other health care providers and insurance companies. Many of those groups launched a massive lobbying effort this spring to complain about the burdensome and complex web of rules and guidance coming out of HCFA. The American Medical Association, for instance, says its members must comply with 110,000 pages of Medicare rules. In a recent AMA survey, one-third of 653 responding physicians reported spending one hour filling out Medicare forms for every one to four hours of patient care. During the past three years, HCFA has tried to improve its regulatory relationships, particularly with physicians. Three years ago, the agency formed a Physicians Regulatory Issues Team. The group, headed by Barbara Paul, a practicing doctor, tries to bring the physician's voice into the rule-making process. Paul also tries to relay HCFA's message to providers. She has a monthly conference with 150 representatives from physician groups to explain exactly what HCFA is doing and to solicit input. Scully says more can be done in this vein. "I plan to sit down with nurses, hospitals and seniors groups and come up with a new regulatory scheme," he says.

Promoting Quality

A free-marketer at heart, Scully says HCFA can be more active in pushing health care providers to improve their quality of care. HCFA collects reams of data from health care providers on all types of treatments and outcomes. Under DeParle, the agency created a Medicare-specific Web site where beneficiaries can compare performance of nursing homes. Scully hopes to take such efforts a step further by publishing as much data on quality as possible in mainstream media outlets.

He knows that his former colleagues in the hospital industry will oppose any effort to publish the data. "I'm going to get pounded on this," he says. He's right. Speaking on condition of anonymity, a hospital lobbyist worries that Scully may be proposing such actions as a way of distancing himself from his past. She also says publishing raw data could confuse beneficiaries and won't really provide the analysis necessary to make informed decisions.

"We pay 50 percent of America's health bill. We have every right to collect data and put it out," Scully says defiantly. "I believe that in health care, especially Medicare and Medicaid, if you really want to have an incremental move towards a more market-based system, which I think is good, you can't do it without consumer information."

Getting media attention is another issue entirely. DeParle notes that a three-year, $240 million study of 24 different measures and outcomes that appeared in the Journal of the American Medical Association last fall generated no national media coverage.

The Blues

One of the more challenging reforms Scully and his team have to tackle is changing Medicare's contractor systems. By law, only insurance companies are eligible to act as contractors. There are 50 today, most of them Blue Cross and Blue Shield plans. Additionally, the law dictates that hospitals choose their own contractors, but the contracts don't establish fixed costs. Insurers can underestimate their expenses to win contracts and then get reimbursed for higher-than-expected expenses. Additionally, because hospitals pick their contractors, HCFA has limited oversight capabilities, so the agency does not have a clear picture of how well contractors are performing, says Leslie Aronovitz, director of health care program administration and integrity issues at the General Accounting Office.

Poor oversight endangers the security of Medicare records, including individual patient information. The HHS inspector general has warned of "material internal weaknesses in the systems, particularly those operated by contractors." These weaknesses could lead to unauthorized access to data, malicious changes to data, improper payments and disruption of critical operations. In its 2000 financial audit, the inspector general found 124 control weaknesses-115 at contractor sites and nine at HCFA. The agency lacks an oversight strategy to deal with the problem, according to the inspector general.

Scully wants to reduce the number of contractors, perhaps to 15, and open the field to such bill processors as VISA and American Express. Introducing competition would lead to improved contractor performance, he says. He also thinks HCFA, not hospitals, should choose the contractors. Reducing the number of contractors would create a more efficient system, says Etheredge.

Under DeParle, HCFA made some strides in improving contractor performance, partly by shifting oversight from the regions to headquarters. But the agency can't introduce more competition by expanding the universe of eligible contractors without new legislative authority. GAO officials say such authority could improve the quality of claims processing, but add that it would take time to realize the benefits. Nearly every administration for the past 20 years has asked Congress to reform the claims system, but hospital and Blue Cross lobbyists have fought back the measures. "We are ready to take on the Blues," Thompson says.

Other challenges are on the horizon, such as upgrading HCFA's ancient computer system. The most pressing need is getting rid of the 30-year old financial management system. The Bush administration's 2002 budget includes $53 million to support the development of a new integrated general ledger accounting system for the agency. An integrated system will go a long way toward letting HCFA detect and collect money owed to the trust fund. But agency officials estimate that the new financial management system won't be fully in place until 2006.

Changing the mind-set, says Scully, is the first step in healing HCFA. "Creating an environment where things are getting done, that is what we want. Right now it's like that movie Groundhog Day. Nothing much seems to get done. It can be frustrating." He continues, "I was offered the job nine years ago in the first Bush administration and I turned it down. That was probably stupid. I thought it was a demotion [from OMB]. Flying on Air Force One was nice, but real health care policy is done at HCFA."