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entitled 'Debt Management: Treasury's Cash Management Challenges and 
Timing of Payments to Medicare Private Plans' which was released on 
March 2, 2009.

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Report to Congressional Requesters: 

United States Government Accountability Office: 
GAO: 

January 2009: 

Debt Management: 

Treasury's Cash Management Challenges and Timing of Payments to 
Medicare Private Plans: 

GAO-09-118: 

GAO Highlights: 

Highlights of GAO-09-118, a report to congressional requesters. 

Why GAO Did This Study: 

A timing difference between cash in- and outflows poses challenges for 
the Department of the Treasury. Increased volatility of monthly cash 
flows may lead to unexpected short-term debt issuance and hence 
increased borrowing. While Social Security payments made at the start 
of the month will diminish gradually in coming years, start-of-month 
payments to Medicare plan sponsors for Medicare Advantage and Part D 
benefits are projected to grow. As requested, this report (1) describes 
how Treasury, the Centers for Medicare & Medicaid Services (CMS), and 
plan sponsors operate under the current payment schedule; (2) 
identifies timing options; and (3) describes potential implications for 
Treasury, CMS, and Medicare. GAO analyzed Treasury cash flows, and 
interviewed Treasury, CMS officials, and plan sponsor representatives. 

What GAO Found: 

Treasury’s primary debt management goal is to finance the government’s 
borrowing needs at the lowest cost over time. Issuing debt through 
regularly scheduled auctions lowers borrowing costs because investors 
and dealers are willing to pay a premium for liquidity and certainty of 
supply. In 2006 GAO reported that Treasury faced misalignment of cash 
flows, with large payments due at the start of the month and large cash 
receipts occurring midmonth. This misalignment results in increasing 
cash flow volatility. The volatility leads Treasury to carry higher 
average cash balances and issue short-term debt outside its regular 
schedule, which may raise overall interest costs. 

Payments to Medicare plan sponsors made at the start of the month have 
increased the misalignment of cash flows. These payments have more than 
doubled between 2005 and 2007, and they are projected to continue to 
grow. GAO developed several options for changing the timing of Medicare 
plan payments that would facilitate cash management, keep payments 
predictable, and treat all plans equally. The options include keeping a 
single payment but making it on a different date or making multiple 
payments each month. 

Treasury officials said that moving some or all of the Medicare 
payments away from the start of the month would greatly facilitate cash 
management. CMS expressed concerns about potentially increased 
administrative burden. Plan sponsors GAO interviewed and CMS’s Office 
of the Actuary indicated that sponsors would generally seek to recoup 
any loss by raising their Medicare bids, thereby raising costs to the 
Medicare program and beneficiaries. The overall impact on the federal 
budget of changing payment timing would depend on the relative size of 
interest cost reductions and plans’ responses. 

Figure: Average Large Start-of-Month Payments Made by Treasury (CY 
2007) (Dollars in billions): 

[Refer to PDF for image] 

Social Security:
Average monthly payment: $21.52 billion. 

Medicare Plans: 
Average monthly payment: $10.024 billion. 

Civil Service Retirement: 
Average monthly payment: $4.052 billion. 

Military Active Duty: 
Average monthly payment: $3.317 billion. 

Military Retirement: 
Average monthly payment: $3.277 billion. 

Veterans Benefits: 
Average monthly payment: $2.503 billion. 

Source: GAO analysis of Treasury data. 

[End of figure] 

What GAO Recommends: 

Congress should consider the impacts of payment timing on Treasury’s 
cash management challenges when enacting legislation that specifies 
payment timing. GAO also recommends that the Treasury and CMS jointly 
study options to improve Treasury’s ability to manage cash flow and 
reduce interest costs while not unduly increasing CMS’s administrative 
burden. Based on the work done and our discussions with Treasury 
officials, we believe it is reasonable for this study to be completed 
by the end of CY 2009. Both Treasury and CMS agreed with GAO’s 
recommendation. 

To view the full product, including the scope and methodology, click on 
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-118]. For more 
information, contact Susan J. Irving at irvings@gao.gov or James C. 
Cosgrove at cosgrovej@gao.gov. 

[End of section] 

Contents: 

Letter: 

Results in Brief: 

Background: 

Current Timing of Payments to Medicare Plan Sponsors Poses Challenges 
for Treasury's Cash Management, Appears Manageable for CMS, And 
Financially Favorable for Plan Sponsors: 

Alternative Payment Options Could Help Address Treasury's Cash 
Management Challenges: 

Changing Payment Timing Involves Balancing Treasury's Cash Management 
Challenges, Administrative Impact on CMS, and Potential Impacts on 
Medicare: 

Conclusions: 

Matter for Congressional Consideration: 

Recommendation for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Estimating the Effect of Medicare Payment Realignments on 
Treasury's Interest Costs: 

The Analysis Used Monthly Data on Cash Balances, Deposits, Withdrawals, 
and Other Variables Compiled from Daily Treasury Statements: 

Greater Volatility Leads to Higher Treasury Cash Balances: 

Interest Cost Reductions from Medicare Payment Realignments: 

Limitations of Our Analysis: 

Appendix II: CMS's Estimates of the Impact of Alternative Payment 
Timing Options on Federal Medicare Payments to Plan Sponsors: 

Appendix III: Comments from the Department of the Treasury: 

Appendix IV: Comments from the Department of Health and Human Services: 

Tables: 

Table 1: Estimated Effects on Treasury's Cash Balances and Interest 
Costs of Changing Payment Timing under GAO's Options Rounded to the 
Nearest $10 Million: 

Table 2: Regressions Explaining Treasury's Average Monthly Cash 
Balance: 

Table 3: Estimated Reduction in Volatility, Cash Balance, and Interest 
Cost: 

Table 4: OACT Upper Bound Estimates of the Impact of Alternative 
Payment Timing Options on Federal Medicare Payments to Plan Sponsors: 

Figures: 

Figure 1: Average Large Start-of-Month Payments Made by Treasury (CY 
2007): 

Figure 2: Smoothing the Payment of Social Security Benefits: 

Figure 3: Net Treasury Deposits and Withdrawals for Fiscal Year 2007: 

Figure 4: Treasury Total Operating Cash Balance in Fiscal Years 2005 
and 2007: 

Abbreviations: 

AHIP: America's Health Insurance Plans: 

CBO: Congressional Budget Office: 

CM: Cash management: 

CMS: Centers for Medicare & Medicaid Services: 

CPC: Center for Drug and Health Plan Choice: 

FEHBP: Federal Employees Health Benefits Program: 

FFS: Fee-for-service: 

HMO: Health maintenance organization: 

MA: Medicare Advantage: 

MA-PD: Medicare Advantage prescription drug plan: 

MIPPA: Medicare Improvements for Patients and Providers Act: 

OACT: Office of the Actuary: 

OFM: Office of Financial Management: 

OIS: Office of Information Services: 

PDP: Prescription drug plan: 

PFFS: Private fee-for-service: 

PPO: Preferred provider organization: 

TGA: Treasury General Account: 

TIO: Term Investment Option: 

TT&L: Treasury Tax and Loan: 

[End of section] 

United States Government Accountability Office:
Washington, DC 20548: 

January 30, 2009: 

The Honorable Charles B. Rangel: 
Chairman: 
Committee on Ways and Means: 
House of Representatives: 

The Honorable Pete Stark: 
Chairman: 
Subcommittee on Health: 
Committee on Ways and Means: 
House of Representatives: 

Congress has delegated to the Department of the Treasury the power to 
borrow the money needed to operate the federal government and make 
borrowing decisions subject to a statutory limit. Treasury's primary 
debt management goal is to finance the government's borrowing needs at 
the lowest cost over time. To meet this objective Treasury issues debt 
through auctions in a "regular and predictable" pattern of dates and in 
amounts across a range of benchmark securities. According to Treasury, 
because investors and dealers rely upon the certainty of supply of 
Treasury securities, they tend to pay a slight premium, which lowers 
Treasury's borrowing costs. Overall, investors are willing to reward 
Treasury with lower borrowing costs in return for the benefits of 
liquidity and certainty of supply. 

In our work on federal cash management, we reported that a timing 
difference between large start-of-month payments and midmonth cash 
inflows from taxes poses challenges for the Department of the Treasury. 
[Footnote 1] Because Treasury seeks to issue debt in a "regular and 
predictable pattern," regular bill issuances cannot be moved or 
suddenly increased by the amount needed to make the large payments that 
must be made at the beginning of the month. To make payments, Treasury 
must raise cash through borrowing, including using short-term 
securities (cash management (CM) bills) issued outside Treasury's 
regular borrowing cycle that require Treasury to pay investors a higher 
rate. Treasury's cash needs throughout the year reflect government 
revenues and outlays. Generally Treasury's borrowing cycles are 
determined by projections of these cash needs. Maintaining sufficient 
cash balances allows the Treasury to absorb unexpected low points in 
receipts or spikes in outlays while limiting issuance of CM bills, but 
maintaining these balances carries costs for taxpayers. The higher 
volatility of Treasury's cash flows increases the size of these 
precautionary cash balances and hence Treasury's overall interest 
costs.[Footnote 2] 

You asked us to examine the effects of start-of-month payments to 
Medicare plan sponsors on Treasury cash management and to develop 
options for better aligning cash flows. Generally, Medicare 
beneficiaries have the option of obtaining medical or drug coverage 
from private health plans sponsored by organizations--typically 
insurance companies--under contract with the Centers for Medicare & 
Medicaid Services (CMS), the agency that administers the Medicare 
program.[Footnote 3] The Medicare Advantage (MA) program offers an 
alternative to the original Medicare fee-for-service (FFS) program. 
[Footnote 4] The Medicare Part D program begun in 2006 offers an 
outpatient prescription drug benefit.[Footnote 5] Part D eligible 
beneficiaries may enroll in stand-alone prescription drug plans (PDP), 
MA plans, or MA plans that offer prescription drug coverage (MA-PD). 
[Footnote 6] Instead of paying providers' claims directly, the federal 
government pays plan sponsors to provide their enrollees' Medicare 
benefits. Of the 44 million Medicare beneficiaries, 25 million were 
enrolled in a Medicare private plan as of January 2008. In 2007, 
Treasury's payments to plan sponsors averaged $10 billion per month. 

Any change in payment timing would affect Treasury, CMS, and the plan 
sponsors that provide benefits under the MA and prescription drug 
programs. This report (1) describes how Treasury, CMS, and Medicare 
plan sponsors operate under the current payment schedule; (2) 
identifies alternative payment approaches designed to address 
Treasury's cash management challenges; and (3) describes potential 
implications of alternative payment timing options for Treasury, CMS, 
and Medicare, including plan sponsors and beneficiaries. 

To address these issues we interviewed Treasury, CMS, and other federal 
and state agency officials involved with making payments to private 
health plan sponsors. We interviewed Treasury officials regarding 
principles and practice of cash and debt management and reviewed 
relevant literature on this subject. Our analysis of Treasury data 
predates the turmoil in financial markets in September 2008. In 
addition, we reviewed statutes, regulations, and agency policy 
documents governing Medicare payments to plan sponsors. We also spoke 
with representatives of five Medicare plan sponsors that offer either 
MA or prescription drug benefits, or both. Although these sponsors were 
selected to reflect the variety of plans receiving start-of-month 
payments because we used a selective sample, our reported results 
cannot be generalized to all plan sponsors.[Footnote 7] 

We developed five alternative payment timing options that met our 
criteria of making cash management easier and less costly for Treasury, 
treating all plan sponsors equally, and offering a predictable schedule 
of payments. Using Treasury data, we developed an illustrative estimate 
of the potential reduction in interest costs under each option and 
projected these reductions over the next 10 years (see appendix I). We 
consulted with finance experts at the Congressional Budget Office (CBO) 
and at the Department of Treasury concerning the assumptions we used 
for these estimates. As discussed in this report, there are potential 
offsets to reductions in interest costs (see appendix II). We obtained 
information on them but did not estimate the net impact of changing 
payment timing. 

To assess the reliability of data used in this study, we examined the 
data to look for outliers and anomalies and addressed such issues as 
appropriate. Where possible and appropriate, we corroborated the 
results of our data analysis with other sources. On the basis of our 
assessment we believe the data are reliable for the purposes of this 
review. 

We conducted this work from February 2008 through October 2008 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Results in Brief: 

The current timing of payments to Medicare plan sponsors poses 
challenges to Treasury's cash management; appears manageable but 
complex and time-consuming for CMS; and may provide income to Medicare 
plan sponsors. In recent years, increased cash flow volatility and 
continued misalignment of the government's cash inflows and outflows 
have contributed to Treasury's cash management challenges. Part of the 
challenge is related to the growth in payments made at the start of the 
month to Medicare plan sponsors for MA and Part D benefits. Between 
2005 and 2007, average monthly Medicare plan payments more than doubled 
due to growth in MA outlays and the inception of the Part D benefit in 
January 2006. Payments to Medicare plan sponsors are the second largest 
category of Treasury's start-of-month payments. The largest category is 
payments to Social Security recipients, but an administrative change in 
that schedule means that those start-of-month payments will diminish 
over time. In contrast, payments to Medicare plan sponsors are 
projected to grow. 

To make the Medicare plan payments, CMS calculates millions of 
individual payments and certifies several hundred payments each month. 
While monthly amounts remain relatively stable during a contract 
calendar year, CMS must nonetheless recalculate and recertify each 
month to take into account the new information received from plan 
sponsors on enrollments and disenrollments. CMS's process for making 
the monthly payments involves staff in several organizational units and 
takes about 2 weeks. 

Plan sponsors use MA and Part D payments to pay health care providers-
-subject to prompt payment rules--and to meet administrative expenses. 
Because Medicare plan sponsors are at risk for the cost of providing 
covered benefits to their enrollees, payments may exceed, equal, or 
fall short of the actual cost of providing care. If start-of-month 
payments are received faster than funds are spent, sponsors may 
accumulate surpluses, which they told us they generally place in low- 
interest, short-term investments until the money is needed. Sponsor 
representatives expressed differing views on the extent to which such 
cash was available for investment and on the importance of any 
resulting income to their business model. Some sponsors indicated that 
the income from these investments was an important revenue source; 
other sponsors said it was not. 

We developed several options for changing payment timing, all of which 
would facilitate Treasury's cash management, keep payments predictable, 
and continue the current practice of treating all plans equally. The 
options included keeping a single payment but making it on a different 
date or making multiple payments each month. Our illustrative estimates 
of potential interest cost reductions under the options ranged from $40 
million to $90 million per year depending on the assumptions used. 

Treasury officials told us that any change in payment timing that moved 
some or all of the Medicare payments to a different time of the month 
would greatly facilitate cash management. They said that better 
aligning the payments with either mid-month cash inflows from tax 
deposits or with their regularly scheduled debt issuances on Thursdays 
would facilitate their management of the government's cash flows. CMS 
officials expressed concerns about any change in payment timing that 
would add to an already complex and labor-intensive process. CMS 
officials indicated that maintaining its practice of preparing Medicare 
plan payments once per month would have the least effect on its 
operations. 

All of the plan sponsor representatives we interviewed expressed 
concerns about changes to payment timing. Sponsors generally indicated 
that they would seek to recoup any loss in short-term investment income 
by increasing their Medicare bids. This in turn would increase Medicare 
spending. It would also increase beneficiary premiums or cost sharing, 
or reduce benefits, or some combination of these. Thus, alternative 
payment timing options could raise costs to the Medicare program and 
beneficiaries, depending upon the magnitude of plan sponsors' 
responses. 

Staff at the CMS Office of the Actuary (OACT) said they would expect 
plan sponsors to respond to a change in payment timing by altering 
their Medicare bids. The direction and magnitude of any change in bids 
would depend on which payment timing option was selected. In addition, 
OACT indicated that the change in bids would likely vary by the size of 
plan, with smaller plan sponsors seeking to more fully recover any lost 
investment income. OACT also noted that competition among plans-- 
particularly stand-alone Part D plans--means that some sponsors might 
be unwilling to raise their bid if doing so risks losing market share. 
OACT estimated the upper bounds for changes in federal Medicare 
payments under the various payment timing options, assuming that all 
plan sponsors reflected all of their revenue changes in their bids. 
OACT estimates ranged from a $20 million per year reduction to a $120 
million per year increase in Medicare plan payments. The overall impact 
on the federal budget of a change in payment timing would depend on the 
relative size of interest cost reductions and plans' responses. 

Even assuming, however, that sponsors increase their Medicare bids 
sufficient to entirely offset any reductions in interest costs that 
accrue to the federal government, a case can be made that this would 
increase transparency about the costs of Medicare programs. 
Accordingly, we believe that while the potential for higher Medicare 
spending should be considered, it should not be the sole or determining 
factor of whether the current timing of payments to Medicare plan 
sponsors should be changed. 

Congress should consider Treasury's cash management challenges when 
enacting legislation that specifies payment timing; if payment timing 
is not specified, Congress should direct implementing agencies to 
consider Treasury's cash management challenges in establishing payment 
schedules. We also recommend that the Secretary of the Treasury and the 
Administrator of CMS convene a joint effort to study options to improve 
Treasury's ability to manage cash flow and reduce interest costs while 
not unduly increasing administrative burden for CMS. Based on the work 
done and our discussions with Treasury officials, we believe it is 
reasonable for this study to be completed by the end of calendar year 
(CY) 2009. Both Treasury and CMS agreed with GAO's recommendation. 

Background: 

Treasury's Cash Management Challenges: 

In our earlier reviews we reported that Treasury faces challenges due 
to a misalignment in the timing of cash flows. Cash outflows for 
payments in several large programs are made at the start of the month-
-a time when Treasury does not generally have sufficient inflows to 
make the payments. These start-of-month payments represent a large 
share of Treasury's total cash outflows. About one-quarter of the 
government's annual fiscal cash outlays (withdrawals excluding debt 
redemption) have taken place in the first 3 days[Footnote 8] of each 
month since fiscal year 2005. Payments for Social Security benefits are 
the largest single type of start-of-month payment,[Footnote 9] and the 
second largest is for Medicare benefits. (See figure 2.) Payments are 
also made at the start of the month for civilian and military retiree 
benefits, military personnel, and veterans benefits. Large cash 
inflows, however, generally occur at other times of the month, that is, 
midmonth from tax receipts and on Thursdays from the issuance of 
regularly scheduled Treasury securities. 

Figure 1: Average Large Start-of-Month Payments Made by Treasury (CY 
2007): 

[Refer to PDF for image] 

Social Security:
Average monthly payment: $21.52 billion. 

Medicare Plans: 
Average monthly payment: $10.024 billion. 

Civil Service Retirement: 
Average monthly payment: $4.052 billion. 

Military Active Duty: 
Average monthly payment: $3.317 billion. 

Military Retirement: 
Average monthly payment: $3.277 billion. 

Veterans Benefits: 
Average monthly payment: $2.503 billion. 

Source: GAO analysis of Treasury data. 

[End of figure] 

This lack of alignment between the timing of large cash inflows and 
outflows means that Treasury may need to borrow to make payments, and 
this borrowing may raise overall interest costs. Our prior work showed 
that Treasury had come to rely on cash management (CM) bills when 
Treasury's operating cash balance was low. CM bills are short-term 
securities issued outside of Treasury's regular borrowing schedule. 
They provide Treasury the flexibility to raise cash needed to make 
start-of-the-month payments, but Treasury has paid a premium for doing 
so in part because of their irregularity and short-term nature. 
[Footnote 10] 

Our previous work explored two possible alternatives to this borrowing: 
(1) Treasury could accumulate and maintain higher cash balances and (2) 
Treasury should explore ways to address the misalignment of cash flows. 
Each of these alternatives is discussed below. 

Higher cash balances are generally costly and raise issues for monetary 
policy. We found that one alternative--accumulating and maintaining 
higher cash balances in order to make payments--presented problems both 
in terms of cost and in terms of the implications for the conduct of 
monetary policy. Maintaining higher cash balances is likely to be 
costly because Treasury generally faces a negative funding spread. That 
is, the interest earned on cash balances is generally insufficient to 
cover the cost of the increased borrowing needed to maintain these 
balances. 

In addition, Treasury has faced capacity constraints in making short-
term investments of excess cash.[Footnote 11] Our 2007 review found 
that Treasury's ability to invest its excess cash balances above its 
target balance faced capacity constraints and concentration risk. Under 
the law in effect in 2007, Treasury was only permitted to invest its 
excess cash balances in depository institutions and in obligations of 
the U.S. government. Treasury's two permanent vehicles--Treasury Tax 
and Loan (TT&L) notes and the Term Investment Option (TIO) offerings--
subject Treasury to high concentration risk and have limited capacity. 
By capacity concerns, we mean that Treasury's ability to invest all 
available cash may be hindered because of decreases in the number of 
participants or insufficient collateral available for depository 
institutions to secure Treasury's investments on days when Treasury has 
high cash balances. According to Treasury, at times it has been unable 
to place all of its cash in part because of a reduction in the number 
of participants in its investment programs.[Footnote 12] 

Moreover, Treasury's balances can affect the conduct of monetary 
policy. Treasury can make short-term investments of excess cash: that 
is, cash not needed to make payments or to meet its target balance in 
its General Account (TGA).[Footnote 13] If Treasury's TGA balance 
exceeds or falls short of its target, the Federal Reserve must 
neutralize the change in overall reserves through market interventions. 
If Treasury has greater amounts of short-term cash than can be invested 
through other investment programs, the cash would have to be deposited 
into the TGA. If the TGA exceeded its target, the Federal Reserve would 
have to inject large amounts of reserves into the market. On the other 
hand, insufficient funds in the Treasury's total operating cash balance 
could cause the TGA to fall below its target, and the Federal Reserve 
would have to take reserves out of the system.[Footnote 14] 

Treasury's decisions about how much cash to hold are also affected by 
the fact that it must maintain a target balance in the TGA large enough 
to avoid an overdraft. Treasury generally targets a $5 billion balance 
in the TGA. An overdraft of the TGA could occur if the anticipated 
receipts for the day fall short of expectation or if there are 
unanticipated disbursements. Treasury cannot risk an overdraft in its 
TGA account because the Federal Reserve is not authorized to lend 
directly to Treasury, in part to preserve the Federal Reserve's 
independence as the nation's central bank. Although an account balance 
greater than $5 billion would provide Treasury with increased overdraft 
protection, it could also increase borrowing, which would be costly 
whenever Treasury faces a negative funding spread. 

Treasury does not have authority to control the timing of all cash 
flows. Our prior work also recommended that Treasury explore additional 
opportunities for closer alignment of cash flows. Treasury, however, is 
a passive agent; it collects and disburses federal funds at agencies' 
request. It does not determine when major benefit payments are made or 
when tax payments are due. For example, the payment dates of civil 
service and railroad retirement are set by law. Due dates for tax 
payments are also set by federal statute. 

A precedent for changing the timing of Treasury payments was set when 
the Social Security Administration adjusted the date each month that 
benefits are paid to new Social Security recipients. These actions will 
help smooth the payment of Social Security benefits--the largest 
federal benefit payment. Prior to June 1997, regular monthly Social 
Security benefits were paid on (or around) the 3RD of each month. In 
1997, the payment date was changed for beneficiaries filing after May 
1997. These new beneficiaries are paid on the 2ND, 3RD, or 4TH 
Wednesday of the month depending on their date of birth. Social 
Security benefits paid at the start of the month are anticipated to 
remain relatively steady for a number of years and then decline. 
Because beneficiaries receiving their benefits before 1997 continue to 
receive benefits at the start of the month, our prior work estimated 
that the large payments for Social Security benefits could last another 
10 years. (See figure 2.) 

Figure 2: Smoothing the Payment of Social Security Benefits: 

[Refer to PDF for image] 

This figure is an illustration of the following information: 

Smoothing the Payment of Social Security Benefits: 

SSA’s decision to change the timing of Social Security payments was one 
of the proposals made by federal agencies in response to the National 
Performance Review, an Administration reinvention initiative. SSA 
sought to improve its customer service and smooth workload peaks 
associated with paying all benefits on the same day. SSA wanted to 
reach its goal of minimal wait times for service to customers, e.g., 
with questions about their Social Security check. SSA believed that 
service was deteriorating and would deteriorate further as the baby 
boom generation retired while SSA’s resources were reduced. SSA also 
believed that changing payment timing would benefit the business and 
banking communities, helping them to better utilize their resources 
throughout the month that were used to process Social Security payments
and to reduce operational risk to these communities due to the large 
payment file processed to pay benefits. 

Under the Social Security Act, the SSA Commissioner was given 
discretion over the timing of payments. Prior to making the change, 
SSA’s change was published in the Federal Register for public comment. 
SSA also held 10 focus groups at 5 locations around the country and 
conducted meetings with stakeholders including representatives from the 
business community, financial community, other government agencies 
including the Department of Treasury, the Federal Reserve, the U.S. 
Postal Service, and advocacy groups. SSA stated that the overwhelming 
consensus of the meetings was support for payment timing change. 

SSA considered changing payment timing for current beneficiaries but 
rejected this for two reasons. First, changing the payment date would 
disrupt monthly payment arrangements for current beneficiaries. Second, 
SSA did not have legislative authority to make a one-time additional 
payment to current beneficiaries that would cover the period from the 
old to new payment date. 

SSA exempted certain individuals from the payment timing change because 
they had low incomes: (1) Social Security beneficiaries where the 
family received income from Supplemental Security Income and (2) 
beneficiaries whose Medicare premium was paid by the state in which 
they lived. SSA stated that exemption of this second group had been 
requested by the Health Care Financing Administration, the federal
agency that administered the Medicare program. 

Source: Federal Register, Vol. 62, No. 28, February 11, 1997, p, 6114. 

Note: The Health Care Financing Administration is now CMS. 

[End of figure] 

Payments to Medicare Plan Sponsors: 

In 2007, approximately 288 plan sponsors contracted with CMS to provide 
benefits under the MA program, the Part D program, or both.[Footnote 
15] Plan sponsors received approximately $121 billion in Medicare 
payments from Treasury--about $78 billion for the MA program and about 
$43 billion for the Part D program that year[Footnote 16]. These 
payments were concentrated in a small number of plan sponsors; 6 
sponsors received about half of all Medicare plan payments. Payments to 
sponsors are fairly stable from month to month because, generally, 
beneficiaries may decide on a new plan before the start of each year 
and have limited opportunities to change their selection. 

Plans in the MA program provide Medicare-covered services and may 
provide additional benefits relative to those available under 
traditional Medicare FFS.[Footnote 17] For each MA enrollee, Medicare 
pays plan sponsors a fixed amount monthly that is based on a bid and a 
benchmark. MA sponsors submit bids to CMS that reflect their projected 
revenue requirements for the medical expenses, nonmedical expenses, and 
profit margin associated with supplying the benefit package available 
in the Medicare FFS program. If the sponsor's bid is higher than the 
administratively set rates, known as benchmarks, Medicare pays the 
sponsor the amount of the benchmark, and the sponsor must charge 
beneficiaries a premium to collect the amount by which the bid exceeds 
the benchmark. If the sponsor's bid is lower than the benchmark, the 
sponsor receives the amount of the bid plus additional payments, known 
as rebates, equal to 75 percent of the difference between the benchmark 
and the bid. MA sponsors are required to spend their rebates on 
additional benefits, reduced cost sharing, reduced premiums, or a 
combination of the three. 

Plan sponsors in the Part D program provide outpatient prescription 
drug coverage to Medicare FFS beneficiaries who enroll in stand-alone 
prescription drug plans (PDP) and to MA beneficiaries through their MA 
plans (MA-PD).[Footnote 18] Medicare makes a per capita monthly 
prospective payment to sponsors based on estimates that sponsors 
provide in their approved bids prior to the beginning of the plan year. 
These payments consist of three subsidies: (1) the direct subsidy, 
which, together with beneficiary premiums, is designed to cover the 
sponsor's cost of providing the benefit; (2) the reinsurance subsidy, 
which covers drug costs for beneficiaries who have reached catastrophic 
coverage;[Footnote 19] and (3) the low-income subsidy, which covers 
premiums and copayments for certain low-income beneficiaries. The 
following year, CMS reconciles these prospective payments with 
sponsors' actual costs to determine whether sponsors owe money to 
Medicare or Medicare owes money to sponsors. In addition, CMS must 
determine whether risk-sharing payments are required to account for 
sponsors' unexpected profits and losses. 

Medicare payments for MA and Part D are paid on the first day of each 
month that is not a weekend or holiday.[Footnote 20] MA plan sponsors 
that also provide a Part D benefit receive combined payments that 
reflect amounts for each program. Part C of the Social Security Act 
requires that the Secretary make monthly payments to plan sponsors in 
advance of the coverage provided under MA, while the statute 
establishing Part D gives the Secretary of HHS more discretion on 
payment timing for benefits provided under Part D.[Footnote 21] Thus, 
HHS is not precluded by the Social Security Act from paying MA-PD plans 
or PDP plans for Part D coverage on a time frame different than MA 
plans are paid for Part C benefits. 

Plan Sponsors' Payments to Providers: 

The MA program offers a variety of plans. The three main types of plans 
are health maintenance organizations (HMO), preferred provider 
organizations (PPO), and private fee-for-service (PFFS).[Footnote 22] 
Generally, each type of plan in the MA program provides services 
through different arrangements with contracted providers or by 
purchasing services from noncontracted providers. Medicare Advantage 
HMOs and PPOs establish networks of physicians, hospitals, and other 
providers. Typically, HMOs pay providers on a salary, FFS, or 
capitation basis,[Footnote 23] and PPOs may pay providers on a 
discounted FFS basis. In contrast, the vast majority of PFFS plans 
operate without an established provider network and pay providers on a 
FFS basis. MA plan sponsors must pay 95 percent of "clean claims"-- 
generally those that have no defect or do not lack any required 
substantiating documentation--within 30 days of receipt if they are 
submitted by an enrollee of a PFFS plan or are claims for services 
obtained from out-of-network providers. For clean claims that are not 
paid within 30 days, the MA plan sponsor must pay interest. All other 
claims must be paid or denied within 60 calendar days from the date of 
the request.[Footnote 24] 

PDP and MA-PD plan sponsors generally contract with pharmacies to 
provide Part D covered drugs to enrollees. Sponsors negotiate with 
pharmacies in order to include a sufficient number and geographic 
distribution of pharmacies in their networks. Sponsors reimburse the 
pharmacy for the cost of the drug, plus a dispensing fee. Beginning 
January 1, 2010, plan sponsors must make payment on all clean claims 
submitted by pharmacies within 14 days of receipt for claims submitted 
electronically and 30 days for claims submitted otherwise. If payment 
for a clean claim is not made within that time frame, the plan sponsor 
must pay interest to the pharmacy that submitted the claim.[Footnote 
25] 

Current Timing of Payments to Medicare Plan Sponsors Poses Challenges 
for Treasury's Cash Management, Appears Manageable for CMS, And 
Financially Favorable for Plan Sponsors: 

The current timing of payments to Medicare plan sponsors poses 
challenges to Treasury's cash management, appears manageable if complex 
and time-consuming for CMS, and may provide income to Medicare plan 
sponsors. Between 2005 and 2007 the size of average start-of-month 
payments to plan sponsors more than doubled due to higher payments to 
MA plan sponsors and the start of the Part D drug benefit in 2006. The 
growth in MA payments has widened the misalignment between cash inflows 
and outflows and increased Treasury's challenges in managing its cash 
position. Over the same period, the volatility of Treasury's cash 
balances has also grown, adding to Treasury's cash management 
challenges. To make the start-of-month payments to Medicare plan 
sponsors, CMS has developed a process involving several CMS 
organizational units that allows CMS to calculate, review, and certify 
hundreds of payment amounts each month to plan sponsors. Plan sponsors 
we spoke with said they use the Medicare plan payments to pay providers 
within time frames specified by government regulations. Where payments 
are not yet needed to meet plan expenses, plan sponsors told us they 
keep cash in conservative, low-interest, short-term investments. Some 
sponsors indicated that the income from these investments was an 
important revenue source; other sponsors said it was not. 

Misalignment of Cash Flows Continues to Present Treasury with Cash 
Management Challenges: 

The cash management challenges we found in our prior work have 
continued for Treasury. The volatility of cash flows has increased, and 
large cash inflows and outflows remain misaligned. Because payments to 
Medicare plan sponsors for MA and Part D benefits are made at the start 
of each month, they increase the misalignment between cash inflows and 
outflows and add to Treasury's cash management challenges. While the 
start-of-month payments for Social Security will diminish over time, 
[Footnote 26] payments to Medicare plan sponsors are expected to grow. 

Volatility of Treasury's Cash Flows Continued in Fiscal 2007: 

Treasury confirmed that it continues to face cash management challenges 
due to the misalignment of cash flows. Treasury data illustrate the 
continued misalignment of cash inflows and outflows (deposits and 
withdrawals) in fiscal year (FY) 2007. (See figure 3.) 

Figure 3: Net Treasury Deposits and Withdrawals for Fiscal Year 2007: 

[Refer to PDF for image] 

This figure is a multiple line graph depicting the following data: 

Net Treasury Deposits and Withdrawals for Fiscal Year 2007: 

Date: 10/2; 
Deposits: $22.656 billion; 
Withdrawals: -$28.104 billion. 

Date: 11/2; 
Deposits: $6.055 billion; 
Withdrawals: -$6.941 billion. 

Date: 12/2; 
Deposits: $16.502 billion; 
Withdrawals: -$57.068 billion. 

Date: 1/2; 
Deposits: $34.638 billion; 
Withdrawals: -$29.903 billion. 

Date: 2/2; 
Deposits: $9.434 billion; 
Withdrawals: -$37.978 billion. 

Date: 3/2; 
Deposits: $9.638 billion; 
Withdrawals: -$42.932 billion. 

Date: 4/2; 
Deposits: $24.31 billion; 
Withdrawals: -$20.434 billion. 

Date: 5/2; 
Deposits: $15.331 billion; 
Withdrawals: -$8.488 billion. 

Date: 6/2; 
Deposits: $18.968 billion; 
Withdrawals: -$59.749 billion. 

Date: 7/2; 
Deposits: $24.693 billion; 
Withdrawals: -$21.41 billion. 

Date: 8/2; 
Deposits: $7.392 billion; 
Withdrawals: -$7.057 billion. 

Date: 9/2; 
Deposits: $22.233 billion; 
Withdrawals: -$18.904 billion. 

Date: 9/30; 
Deposits: $14.95 billion; 
Withdrawals: -$7.628 billion. 

Source: GAO analysis of Treasury data. 

Note: These data are net of debt transactions (issuances and 
redemptions). 

[End of figure] 

In FY 2007, as we found in our prior work, payments Treasury made on 
the first three days[Footnote 27] of the month comprised about one- 
fourth of the total cash payments net of debt transactions. As shown in 
figure 4, the volatility of Treasury's cash balances increased in FY 
2007 relative to FY 2005.[Footnote 28] 

Figure 4: Treasury Total Operating Cash Balance in Fiscal Years 2005 
and 2007: 

[Refer to PDF for image] 

This figure is a multiple line graph depicting the following data: 

Treasury Total Operating Cash Balance in Fiscal Years 2005 and 2007: 

Date: 10/1; 
Total Operating Cash Balance, FY 2005: $18.279 billion; 
Total Operating Cash Balance, FY 2007: $52.778 billion. 

Date: 11/1; 
Total Operating Cash Balance, FY 2005: $35.111 billion; 
Total Operating Cash Balance, FY 2007: $57.276 billion. 

Date: 12/1; 
Total Operating Cash Balance, FY 2005: $7.564 billion; 
Total Operating Cash Balance, FY 2007: $17.355 billion. 

Date: 1/3; 
Total Operating Cash Balance, FY 2005: $20.48 billion; 
Total Operating Cash Balance, FY 2007: $20.548 billion. 

Date: 2/1; 
Total Operating Cash Balance, FY 2005: $49.327 billion; 
Total Operating Cash Balance, FY 2007: $66.227 billion. 

Date: 3/1; 
Total Operating Cash Balance, FY 2005: $6.994 billion; 
Total Operating Cash Balance, FY 2007: $16.219 billion. 

Date: 4/1; 
Total Operating Cash Balance, FY 2005: $10.202 billion; 
Total Operating Cash Balance, FY 2007: $6.089 billion. 

Date: 5/2; 
Total Operating Cash Balance, FY 2005: $83.198 billion; 
Total Operating Cash Balance, FY 2007: $123.613 billion. 

Date: 6/1; 
Total Operating Cash Balance, FY 2005: $9.531 billion; 
Total Operating Cash Balance, FY 2007: $7.92 billion. 

Date: 7/1; 
Total Operating Cash Balance, FY 2005: $10.096 billion; 
Total Operating Cash Balance, FY 2007: $8.242 billion. 

Date: 8/1; 
Total Operating Cash Balance, FY 2005: $26.966 billion; 
Total Operating Cash Balance, FY 2007: $26.611 billion. 

Date: 9/1; 
Total Operating Cash Balance, FY 2005: $6.327 billion; 
Total Operating Cash Balance, FY 2007: $8.593 billion. 

Date: 9/27; 
Total Operating Cash Balance, FY 2005: $57.543 billion; 
Total Operating Cash Balance, FY 2007: $75.237 billion. 

Source: GAO analysis of Treasury data. 

[End of figure] 

In FY 2008, Treasury's cash management challenges have been heightened 
by increases in the federal deficit. At the April 2008 meeting of the 
Treasury Borrowing Advisory Committee, Treasury highlighted the flat 
growth of individual and corporate income taxes, an increase in outlays 
of 6 percent, and the impact of the stimulus program enacted in 
February 2008.[Footnote 29] Volatility in receipts and outlays as well 
as debt redemptions and sales by the Federal Reserve resulted in less 
predictable cash balances, making cash management an ongoing challenge. 
According to a senior Treasury official, rapid growth in financing 
needs resulted in an increasing dependence on CM bills. In the first 
half of FY 2008, Treasury issued over $300 billion in CM bills compared 
with $267 billion in all of FY 2007. 

Payments to Medicare Plan Sponsors are Part of Treasury's Cash 
Management Challenge: 

The Medicare payments Treasury must make at the start of the month are 
primarily to MA and Part D plan sponsors.[Footnote 30] In CY 2007 these 
payments represented about 25 percent of total cash payments made on 
the same day.[Footnote 31] These payments have increased in the past 2 
years following the inception of the Part D benefit in January 2006 and 
increases in MA outlays.[Footnote 32] Total payments to Medicare plan 
sponsors made at the start of the month were $46.7 billion in CY 2005, 
$105 billion in CY 2006, and $120 billion in CY 2007, for an average 
$10 billion per month in CY 2007. A senior Treasury official told us 
that the growing Medicare payments at the start of the month pose cash 
management challenges. 

In contrast to Social Security payments made at the start of the month, 
payments to Medicare plan sponsors are projected to continue to grow 
over the next 10 years. Estimates prepared in Spring 2008 by both CBO 
[Footnote 33] and CMS[Footnote 34] show spending for Medicare MA and 
Part D combined growing at an annual rate of about 10 percent from FY 
2009 through FY 2017. However, enactment of the Medicare Improvements 
for Patients and Providers Act of 2008 (MIPPA)[Footnote 35] in July 
2008 is likely to reduce estimated spending growth. In its cost 
estimate for MIPPA, CBO noted that the act would decrease MA enrollment 
to about 12.0 million individuals in 2013 relative to CBO's previous 
baseline estimate of 14.3 million. The estimated effects of MIPPA on MA 
spending will be reflected in CBO's January baseline and in next 
spring's Medicare Trustees report. 

CMS Calculates and Certifies Payment Amounts Monthly to Ensure Plan 
Sponsors are Paid at the Start of the Month: 

For MA and Part D payments to be made at the start of a month, CMS's 
Office of Information Services (OIS), Center for Drug and Health Plan 
Choice (CPC,) and Office of Financial Management (OFM) work together to 
calculate and certify payment amounts and transmit this information to 
Treasury. CMS requires that plan sponsors provide information on 
enrollment for the payment period and submit these data by a specific 
date each month, usually midmonth. The agency completes the payment 
calculation and verification process in approximately 2 weeks. 

OIS takes approximately 3 days to calculate MA and Part D payments each 
month. OIS computes beneficiary-level payments for each plan using 
enrollment and other data. The number of beneficiaries reported for 
each plan may vary slightly from month to month, primarily due to 
enrollments of newly eligible beneficiaries and disenrollments due to 
deaths or beneficiaries moving out of a plan's service area. For 
payment purposes, each plan's enrollment is measured as of a cutoff 
date, generally in the middle of the month, that is specified at the 
beginning of the contract year. Although beneficiaries' coverage 
becomes effective the first of the month after they enroll, enrollments 
processed after the payment cutoff date are not reflected in that 
month's payment but rather in the capitation payment for the subsequent 
month. For example, sponsors must submit plan enrollments by the cutoff 
date of April 16 to receive a May 1 payment for these individuals. If 
the sponsors submit enrollments after the cutoff day in April (i.e., 
enrollments submitted to CMS between April 17 and 30), they will not 
receive their May payments for those beneficiaries until June 1. 

Next, CPC reviews and validates the calculations for each enrollee and 
creates a summary file of plan payments. This validation takes 3 days. 
CPC then sends a file to OFM that specifies the amounts that will need 
to be disbursed from the various Medicare appropriations accounts for 
each payment.[Footnote 36] OFM notifies Treasury of the totals, 
certifies the payment amounts, and prepares a formatted file for 
Treasury with the payments. OFM then sends this payment file to 
Treasury 2 to 3 business days prior to the payment date. OFM staff told 
us that OFM needs 5 business days to complete its work. 

Plan Sponsors Invest Funds Not Yet Needed to Meet Expenses: 

After plan sponsors receive Medicare payments at the start of each 
month, plan sponsors told us they use any funds not immediately 
expended to make short-term investments until drawn down to pay 
providers and meet administrative expenses. Sponsors receive CMS 
payments around the first of each month and incur expenses as bills 
become due. Plan sponsors told us that they keep cash not yet needed to 
meet expenses invested in low-interest, conservative, short-term 
instruments such as Treasury bills and certificates of deposit until 
expended. 

Medicare prompt payment regulations require MA plan sponsors to make 
payment for certain claims within a specified time frame on behalf of 
plan enrollees. MA plan sponsors in our study reported that they 
usually make capitation payments at the beginning of the month or prior 
to the first of the month. They noted that once a provider's contract 
term has begun the timing of sponsors' settlements usually cannot be 
changed before the end of the contract period. In addition to 
capitation, HMOs and other types of plans pay providers on a claims 
basis. MA plan sponsors we spoke with told us that they receive medical 
claims throughout the month and generally settle within 30 days, 
although this could vary by provider. 

For drug claims, the timing of Part D plan sponsors' payments to 
pharmacies is set in their contracts and typically specifies within 30 
days from when a claim is filed. A 2007 University of Texas study found 
that the monthly median payment time for Part D claims processed from 
March through December 2006 ranged from 27 to 33 days.[Footnote 37] In 
May 2006, CMS reported that 18 of the top 20 Part D plans, covering 90 
percent of beneficiaries, were paying pharmacies for claims twice 
monthly.[Footnote 38] One plan sponsor in our study reported that their 
Part D claims are batched and then paid once a week. 

Because MA and Part D plan sponsors are at financial risk for the cost 
of covered services provided to their enrollees, payments may exceed, 
equal, or fall short of the actual cost of providing care. If start-of-
month Medicare payments are received faster than funds are spent, 
sponsors may accumulate surpluses. Plan sponsors we interviewed said 
they use any unexpended portion of their Medicare payments to make 
short-term investments until the money is needed. 

Income from the short-term investment of cash not yet needed to meet 
expenses can play an important part in sponsors' cash management. The 
financial gain from such investments is influenced by the timing of 
sponsors' expenditures and how they invest their Medicare payments. The 
five plan sponsors in our study varied in reporting the significance of 
these investments to their business. A small rural plan sponsor and a 
large nonprofit plan sponsor both stated that earnings from these 
investments are an important source of revenue. Other sponsors stated 
that while they use such investments as a revenue-generating 
instrument, the earnings from short-term investments are not a major 
source of revenue. 

Alternative Payment Options Could Help Address Treasury's Cash 
Management Challenges: 

We developed several options that would either shift the timing of MA 
and Part D payments away from the first of the month, and/or divide a 
single payment into two or more payments. All of the options we 
explored would reduce Treasury's cash management challenges, retain 
predictable payments, and continue the current practice of treating all 
plan sponsors equally. We developed illustrative estimates of the 
potential interest cost reduction and reductions in Treasury's average 
cash balances under alternative payment timing options. 

We developed five options that illustrate a range of approaches to 
changing payment timing. These options were selected to show 
alternatives including a single payment per month, two payments per 
month, and weekly payments. 

Option 1: Make one payment on the 26th of the prior month. 

Option 2: Make two payments, with half of that month's amount paid on 
the 1ST and the other half on the 15th. 

Option 3: Make two payments, with the first payment made on the 20TH of 
the prior month and the remainder paid on the 10th of the month of 
coverage. 

Option 4: Make two retrospective payments with the first payment made 
on the fourth Thursday of the month and the second payment on the 
second Thursday of the following month.[Footnote 39] 

Option 5: Make weekly payments on Thursdays, each payment equal to 1/4 
or 1/5 of the monthly payment amount, depending on the number of 
Thursdays in the month.[Footnote 40] 

We developed two sets of illustrative estimates of the potential 
interest cost reductions based on data from two time frames. One set of 
estimates was based on monthly Treasury cash flow data covering the 
period from October 2002 through December 2007. The other set of 
estimates was based on a more limited period, covering the months after 
the implementation of Medicare Part D in 2006, January 2006 through 
December 2007. The longer period yielded a lower range of estimates for 
the annual interest cost reduction and average monthly cash balances. 
The (higher) estimate from the more recent sample should be given 
greater consideration since it includes only the period during which 
Part D was in effect. For both sets of estimates, for each $1 billion 
reduction in average monthly cash balances, we estimated a reduction in 
annual interest costs of about $53 million. 

We estimated that these options would imply a reduction in the level of 
Treasury's average monthly cash balance of from $720 million to $960 
million (lower range) and from $1.28 billion to $1.73 billion (higher 
range).[Footnote 41] The range of our estimates is summarized in table 
1. Applying a 20-year historic average of the interest rates on 3-month 
bills and 10-year Treasury notes to the estimated reduction in cash 
balances implies a lower range reduction in annual interest costs of 
about $40 million to $50 million and a higher range reduction of about 
$70 million to $90 million. Over time these reductions would grow, 
lowering federal interest costs from what they would otherwise be. We 
projected these amounts over the next 10 years using CBO's baseline 
projections of outlays for FY 2009 to 2018. 

Table 1: Estimated Effects on Treasury's Cash Balances and Interest 
Costs of Changing Payment Timing under GAO's Options Rounded to the 
Nearest $10 Million: 

Annual interest cost reduction: 
Estimate based on October 2002 through December 2007 data: $40 to $50 
million; 
Estimate based on January 2006 through December 2007 data: $70 to $90 
million. 

10-year interest cost reduction: 
Estimate based on October 2002 through December 2007 data: $500 to $670 
million; 
Estimate based on January 2006 through December 2007 data: $890 to 
$1,200 million. 

Source: GAO analysis of Treasury data. 

Notes: Estimates do not reflect any potential offsetting effects. 

Estimates for the reduction in average monthly cash balances and annual 
interest cost reductions are on a calendar year basis; estimates for 10-
year interest cost reductions are on a fiscal year basis. 

[End of table] 

The ranges shown in table 1 reflect a gross reduction in Treasury's 
interest expenses and do not include potential offsetting effects. 
First, our estimates do not account for any interest Treasury could 
earn from its excess cash balances in its short-term investment 
programs. As discussed earlier in this report, Treasury faces capacity 
concerns in which its ability to invest all available cash may be 
hindered by a limited number of participants or insufficient collateral 
available for depository institutions to secure Treasury's investments. 
The actual impact on interest costs of any changes in payment timing 
would depend on the level of cash Treasury holds, the interest rate 
spread, and the timing of investments. 

Second, CMS and CBO said they would expect plan sponsors to respond to 
a change in payment timing, which could result in an increase in costs 
to Medicare and beneficiaries. Most plan sponsors we spoke with 
indicated that they would take steps to recoup any lost income by 
increasing their bids. To the extent that plan sponsors do so, Medicare 
payments to plans would rise. In addition, beneficiaries could face 
increases in premiums, increases in cost sharing, reduced benefits, or 
some combination of the three. These actions would have programmatic 
effects that could raise the overall cost of Medicare, as discussed 
later in the report. Our estimates in table 1 do not include a 
quantification of these effects.[Footnote 42] 

Changing Payment Timing Involves Balancing Treasury's Cash Management 
Challenges, Administrative Impact on CMS, and Potential Impacts on 
Medicare: 

All the options we developed for changing payment timing would 
facilitate Treasury's cash management, but CMS expressed concerns about 
effects on its administrative burden. Among the options, Treasury said 
that better alignment of payments with mid-month cash inflows from tax 
deposits or with its regular borrowing schedule would do the most to 
better align cash flows, but any change that reduced the size of the 
start-of-month payments to plan sponsors would help address cash 
management challenges. CMS, however, expressed concerns about changing 
payment timing. For CMS a change that maintained the practice of 
preparing Medicare plan payments once a month would have the least 
effect on their operations. 

Plan sponsors generally were opposed to any change in payment timing. 
Sponsors told us that any losses in revenue resulting from a change in 
payment timing would be reflected in their bids. This would increase 
Medicare costs as well as raise beneficiaries' premiums and/or reduce 
plan benefits. CMS OACT staff indicated that the impact of the change 
in payment timing would depend on the option selected, whether some or 
all sponsors changed their bids, and whether plan sponsors would seek 
to fully or partially reflect revenue changes in their bids. In 
general, OACT expected that most of the change in investment income 
would affect sponsors' bids, but that the responses might vary by size 
of plan sponsor. OACT noted that large sponsors might be less affected 
by a reduction in the investment income generated from start-of-month 
payments and that competition among Part D plans might serve as a 
disincentive for sponsors to raise their bids. 

Treasury Favors Payments Closely Aligned with Borrowing Schedule or Mid-
Month Tax Deposits: 

Officials at Treasury told us that changes in payment that better align 
cash inflows and outflows by shifting payments away from the start of 
the month would facilitate cash and debt management. Treasury officials 
suggested that one approach would be to shift part or all payments to 
the middle of the month; another approach would be to make multiple 
monthly payments that align with Treasury's regular borrowing schedule. 
Treasury suggested payments on Thursdays because regular short-term 
bills with 4-, 13-, and 26-week maturities are issued on Thursdays. 
[Footnote 43] Treasury officials emphasized, however, that any change 
in payment timing that better aligns Treasury's receipts and payments 
would reduce the volatility of Treasury's cash flows, leading to 
improved debt management and lower interest costs. 

A senior Treasury official suggested that multiple monthly payments to 
plan sponsors could be made while maintaining CMS's existing process of 
calculating and certifying payments once each month. In comments on a 
draft of this report, Treasury said it would welcome the opportunity to 
review each of its payment systems with CMS to determine which 
application best met their needs. 

Approaches Whereby CMS Calculates and Certifies Payments Once per Month 
Would Have Least Effect on Its Operations: 

Asked about alternative payment options, CMS indicated that maintaining 
the practice of preparing Medicare plan payments once per month would 
have the least effect on its operations. Given the time required to 
calculate and certify payment amounts, officials told us that 
conducting these processes multiple times each month would increase 
their workload proportionately. For example, processing payments two or 
four times a month would double or quadruple the number of days devoted 
to calculating and certifying payments. This increase in workload could 
require a reallocation of staff to support the additional work. 

CMS officials stated that the option to make the payment date the 26TH 
of the previous month could be accommodated by moving the enrollment 
cutoff date to earlier in the month. However, it would result in more 
retroactive payment adjustments made in the month following the initial 
month of coverage. Because beneficiaries who enroll after the cutoff 
date are not included in the following month's payment, moving the 
cutoff date forward would increase the period of time during which a 
beneficiary could enroll in a plan and not be included in the next 
month's payment. 

Similarly, CMS officials told us that the agency could accommodate 
other options to adjust the timing of Medicare payments as long as they 
could maintain the practice of calculating and verifying amounts only 
once each month. Thus, the options to pay plan sponsors on the 1ST and 
15TH of each month, two Thursdays each month, or every Thursday would 
have minimal impact on CMS if the options could be implemented in a way 
that allows CMS to calculate and certify payments once a month as is 
currently done. 

In technical comments on a draft of this report, CMS said its payment 
process would need to begin 2 weeks before the option's first payment 
date. The earlier the payment calculation date, the earlier the cut-off 
date for plan enrollment data. As noted, CMS said this would result in 
larger retroactive payment adjustments because monthly payments would 
be based on less current enrollment data. 

Approaches under Which Sponsors Lose Investment Income from Start-of- 
Month Payments May Affect Medicare Spending and Beneficiary Premiums: 

Plan sponsors we interviewed generally told us that they would increase 
or consider increasing their bids to recoup any lost investment income 
and administrative costs resulting from a change in payment timing. If 
bids were increased, Medicare's payments to plans would increase. There 
would be increases in beneficiary premiums, increases in beneficiary 
cost sharing, reduced benefits, or some combination of the three. Thus, 
alternative payment timing options could raise costs to the Medicare 
program and beneficiaries, depending on how plan sponsors reacted. 
[Footnote 44] 

Plan sponsors we spoke with generally said that they would likely 
respond by increasing their MA and Part D bids to offset the lost 
income from their short-term investments. Of the payment alternatives 
we developed, the option to shift the payment date to the 26TH of the 
previous month was the only one that plan sponsors we interviewed 
generally did not see as raising issues. However, one plan sponsor 
indicated that it did not want to receive payments prior to the first 
of the month, expressing concern regarding end-of-year tax liabilities. 

Staff at CBO and the CMS OACT also told us that they would expect plan 
sponsors to respond to a change in payment timing by raising their 
Medicare bids to offset any revenue decline. When we asked OACT staff 
if they could quantify plans' responses to the options, they indicated 
that the impact of the change in payment timing would depend on the 
option selected, whether some or all sponsors changed their bids, and 
whether sponsors would seek to fully or partially reflect revenue 
changes in their bids. The staff expected that most of the change in 
revenue would be reflected in plans' bids, particularly smaller 
sponsors' bids. OACT provided estimates of the impact on federal 
Medicare payments under each option, assuming that all plans reflected 
all of the change in their revenue from short-term investment in their 
bids. These upper bound estimates ranged from a reduction in federal 
Medicare payments of $20 million per year to an increase in federal 
Medicare payments of $120 million per year depending on the option 
selected.[Footnote 45] 

OACT staff said they would expect responses to the alternative payment 
timing options to be influenced by how plan sponsors pay providers. For 
example, if sponsors had to make capitated payments to providers on the 
first of the month but did not receive their Medicare payments on that 
date, they would need to draw down their reserves. If plan sponsors 
received weekly Medicare payments, the effect would be more 
significant; if they received a split payment--with half paid several 
days early and the remainder several days after the first--there would 
be no effect. 

In addition, OACT staff indicated that a change in the timing of 
Medicare payments could affect some Medicare plan sponsors more than 
others. Smaller sponsors and those with significant growth in MA and 
Part D enrollment would likely experience a more significant impact. 
However, OACT said that because large plan sponsors have substantial 
amounts of reserves--which they need to maintain in order to comply 
with state laws--they would not be affected as much by a relatively 
small loss in investment income and might not raise their bids. In 
addition, OACT noted that competition among plans--particularly stand- 
alone Part D plans--means that some sponsors might be unwilling to 
raise their bid if doing so risks losing market share. 

Conclusions: 

All the options we developed for changing the timing of payment to 
Medicare plans embody trade-offs in terms of their impacts on 
Treasury's ability to manage the debt, CMS operations, and Medicare 
plan sponsors. The specific trade-offs vary depending on the specifics 
of a given option. For example, for purposes of cash management, the 
option of making multiple payments on Thursdays would facilitate 
Treasury's cash management by aligning payments with Treasury's regular 
borrowing schedule, but plan sponsors told us that in response to such 
a change they would raise their bids to compensate for either a 
reduction in investment earnings or a need to borrow funds. All of the 
options raise the question of how and to what extent the Medicare 
program and Medicare beneficiaries will be affected if actions are 
taken to address Treasury's cash management challenge. Both the current 
system and any change raise issues of transparency--what is the cost of 
the Medicare Advantage and Part D programs and where are those costs 
shown in the budget. 

Changes in timing and/or frequency of Medicare payments to plan 
sponsors would need to be carefully considered in terms of the near- 
term impacts on operations of both Treasury and CMS and whatever 
actions sponsors might take in response that could increase federal 
Medicare spending and adversely affect beneficiaries. Treasury 
officials told us that they will work with CMS to review their payment 
systems to facilitate an approach that makes multiple monthly payments 
while still requiring only a single certification by CMS. 

While implementation issues remain to be resolved, the benefits from 
changing payment timing might include lower federal interest and debt 
costs over time from what they would otherwise be if the misalignment 
of cash flows continues or--as seems likely--increases. To be sure, the 
net result of a change in payment timing is difficult to determine and 
would depend on the details of the particular option chosen. Plan 
sponsors we spoke with generally said that they would increase or 
consider increasing their bids to fully or partially offset any revenue 
loss due to a change in payment timing. OACT said that larger plan 
sponsors would be better positioned to adjust to a change in payment 
timing that would decrease their investment income. OACT also noted 
that competitiveness concerns could give some plan sponsors a 
disincentive to increase their bid. Even assuming, however, that 
sponsors increase their Medicare bids sufficiently to entirely offset 
any reductions in interest costs that accrue to the federal government, 
a case can be made that this would increase transparency about the 
costs of Medicare programs. Accordingly, we believe that while the 
potential for higher Medicare spending should be considered, it should 
not be the sole or determining factor of whether the current timing of 
payments to Medicare plan sponsors should be changed. 

Matter for Congressional Consideration: 

In designing new programs, Congress should consider the nature of 
Treasury's cash management challenge when enacting legislation that 
specifies payment timing. Where payment timing is not specified, 
Congress should direct the implementing agency to consult with Treasury 
in establishing payment schedules. 

Recommendation for Executive Action: 

We recommend that the Secretary of the Treasury and the Administrator 
of CMS expeditiously convene a joint interagency effort to study 
options identified by GAO and any other options that would improve 
Treasury's ability to manage cash flow and reduce overall interest 
costs while not unduly increasing administrative burden for CMS. 

For each option, the joint study should include discussion of: 

* operational impacts on and likely consequences for cash management, 
CMS, and Treasury operations; 

* plan sponsors' likely responses and the consequences of these for the 
Medicare program and beneficiaries; 

* the expected change in federal costs and the distribution of any 
increases or decreases; 

* analysis of feasibility and mechanics of varying payment schedule by 
size/scale of plan; and: 

* what would be needed for implementation, including which options 
would require statutory change and if so the specific changes 
necessary. 

Based on the work done and our discussions with Treasury officials, we 
believe it is reasonable for this study to be completed by the end of 
CY 2009. 

Agency Comments and Our Evaluation: 

We provided drafts of this report to Treasury and HHS. In addition to 
comments on our recommendation, the agencies provided us with technical 
comments that we incorporated where appropriate. We also obtained 
comments from America's Health Insurance Plans (AHIP), a national 
association representing nearly 1,300 health insurance companies. 

Treasury agreed with our recommendation. The agency said that, given 
the growth in Medicare payments experienced since 2005 and the 
projections of continued growth, Treasury is very interested in finding 
a beneficial solution that improves cash and debt management while not 
unduly increasing administrative burden for CMS. Treasury also said 
that it welcomed the opportunity to review its payment systems with CMS 
and looked forward to finding a solution that is in the best interests 
of the government. (See appendix III.) 

CMS, on behalf of HHS, also agreed with our recommendation. The agency 
remarked that it understands that a timing difference between cash 
influx and outflows poses challenges for Treasury that, in turn, raise 
borrowing and interest costs. CMS indicated that it is willing to work 
with Treasury to study alternative payment timing options to address 
the challenges as they relate to Medicare. (See appendix IV.) 

AHIP representatives told us that overall the report captured 
appropriately the views of the health plan industry. They also pointed 
out that, among the payment timing options discussed in this report, 
converting to a retrospective system would be particularly problematic 
for plan sponsors because it would be fundamentally at odds with 
historic and current practice used by both Medicare and commercial 
health insurance payers. AHIP representatives reiterated that if a 
change in payment timing reduced companies' investment income, plan 
sponsors would take that into account by increasing their Medicare bids 
to reflect the loss. Additionally, they noted that such a change would 
likely necessitate revisions in the contracts plan sponsors have with 
capitated providers to reflect the new payment timing arrangement. 

As agreed with your offices, unless you publicly announce the contents 
of this report earlier, we plan no further distribution of it until 30 
days from the date of this letter. We will then send copies of this 
report to the Secretary of the Treasury and the Acting Administrator of 
CMS as well as other interested parties. In addition, the report will 
be available at no charge on the GAO Web site at [hyperlink, 
http://www.gao.gov]. Please contact Susan J. Irving at (202)-512-8288 
or irvings@gao.gov or James Cosgrove at (202) 512-7114 or 
cosgrovej@gao.gov if you have any questions about this report. Key 
contributors to this assignment were Jose Oyola, Rosamond Katz, Linda 
Baker, Shirley Min, and Christina Serna. 

Signed by: 

Susan J. Irving: 
Director for Federal Budget Analysis: 
Strategic Issues: 

Signed by: 

James C. Cosgrove: 
Director, Health Care: 

[End of section] 

Appendix I: Estimating the Effect of Medicare Payment Realignments on 
Treasury's Interest Costs: 

[End of section] 

GAO estimated the potential reduction in Treasury interest costs from 
improving the alignment between Treasury deposits and withdrawals (or, 
equivalently, its receipts and expenditures) by moving payments to 
Medicare plans for Medicare Advantage and Part D benefits away from the 
first of the month. The lower range of our estimates suggests that 
realigning Medicare private plan payments could reduce interest costs 
between $498 million and $672 million over the 10-year budget window 
from FY 2009 to FY 2018, depending on the realignment option chosen. 
The upper range of our estimates suggests that the same options could 
reduce interest costs between $891 million and $1,201 million ($1.2 
billion) over the 10-year budget window. 

The first step in our analysis, after compiling monthly values based on 
daily data from October 2002 through December 2007, was to estimate a 
relationship between Treasury's average monthly cash balances and the 
volatility of Treasury's net deposits, where the latter is measured as 
the standard deviation of daily deposits less withdrawals, excluding 
those arising from debt issuances and redemptions.[Footnote 46] The 
estimated relationship suggests that cash holdings rise in response to 
increases in volatility and that the responsiveness of cash holdings to 
volatility became substantially more pronounced after the full phase-in 
of the Medicare Part D payments program in June 2006. Our lower range 
interest cost reduction estimates are based on the cash balance/ 
volatility relationship estimated over our full data sample from 
October 2002 through December 2007 while our higher range interest 
reduction estimates are based on the relationship estimated over the 
later part of the sample beginning in June 2006. 

Our next step was to develop five different options for realigning 
Medicare Advantage and Part D plan payments during CY 2007. After the 
hypothetical redistribution of payments, we calculated the standard 
deviation of Treasury deposits less withdrawals for each option. All 
options reduced the volatility of net deposits. We then used the 
estimated relationship between cash balances and volatility along with 
each option's volatility reduction to derive the implied reduction in 
Treasury's average cash balance in CY 2007. 

Finally, to estimate the potential reduction in interest costs during 
2007, we multiplied the cash balance reduction by an interest rate of 
5.32 percent, which is the average of rates on 3-month Treasury bills 
and 10-year Treasury notes over the 20-year period from 1988 through 
2007. We extrapolated the 2007 interest cost reduction estimate over 
the FY 2009 to FY 2018 budget window using CBO's projected growth in 
total federal outlays.[Footnote 47] 

The Analysis Used Monthly Data on Cash Balances, Deposits, Withdrawals, 
and Other Variables Compiled from Daily Treasury Statements: 

Our analysis used monthly data that we compiled from Daily Treasury 
Statements covering the period from October 2002 through December 2007. 
The dependent variable in our analysis was the average monthly cash 
balance, which includes the effect of debt-related transactions. By 
definition, the change in Treasury's cash balance equals total cash 
deposits minus total cash withdrawals. Cash balances are affected not 
only by tax receipts and payments for goods and services but also by 
debt issuances and redemptions. 

The principal explanatory variable in our analysis was the standard 
deviation of deposits minus withdrawals, which is a measure of payment 
volatility. The deposit and withdrawal flows used for this purpose 
excluded debt issuances and debt redemptions. In essence, therefore, 
our analysis treated debt-related transactions as a byproduct of 
mismatches in the amount and timing of the underlying nondebt receipts 
and expenditures. The exclusion of debt issuances and redemptions 
facilitated our analysis. The shifts in the timing of Medicare payments 
in our alternative scenarios would affect the timing and amount of debt 
issuances and redemptions in a way that would be difficult for us to 
represent. By using measures of receipts and expenditures that exclude 
debt-related transactions, we did not have to make explicit assumptions 
about the resulting changes in debt issuances and redemptions. 

We also compiled several other monthly measures for consideration as 
variables explaining cash balances. Among these were withdrawals--a 
measure of the scale of outlays--and the rate of interest--a measure of 
the cost of holding cash. We also created a dummy variable for each 
month of the year to control for seasonal patterns in cash balances. 
Apart from the volatility variable, selected monthly dummy variables, 
and a moving average error term introduced to eliminate serial 
correlation of the residuals, no other variable had a statistically 
significant effect on Treasury's cash balances.[Footnote 48] 

Greater Volatility Leads to Higher Treasury Cash Balances: 

Table 2 presents the estimated relationship between Treasury's average 
monthly cash balance and volatility as measured by the standard 
deviation of deposits minus withdrawals. The results indicate that 
greater volatility leads to higher Treasury cash balances. Conversely, 
measures that would reduce volatility, such as realigning Medicare Part 
D payments, would enable Treasury to hold lower cash balances and 
thereby reduce the interest cost of holding cash. In addition to 
contemporaneous and lagged values of the volatility measure, the 
equations include several monthly dummy variables to control for 
seasonal patterns in cash balances and moving average error terms to 
mitigate serial correlation. All of the included variables have 
coefficients that are significant at or below the .05 level, except for 
the constant term in the equation that was estimated over the full 
sample period. 

Table 2: Regressions Explaining Treasury's Average Monthly Cash 
Balance: 

Constant: 
A: Full sample: Coefficient: -4.825; 
A: Full sample: t-Statistic: -1.20; 
B: Recent portion of sample: Coefficient: - 32.499[A]; 
B: Recent portion of sample: t-Statistic: -5.89. 

Volatility t: 
A: Full sample: Coefficient: 1.196[A]; 
A: Full sample: t-Statistic: 7.16; 
B: Recent portion of sample: Coefficient: 1.954[A]; 
B: Recent portion of sample: t-Statistic: 9.05. 

Volatility t-1: 
A: Full sample: Coefficient: 1.188[A]; 
A: Full sample: t-Statistic: 5.37; 
B: Recent portion of sample: Coefficient: 1.759[A]; 
B: Recent portion of sample: t-Statistic: 7.23. 

Volatility t-2; 
A: Full sample: Coefficient: 0.379[B]; 
A: Full sample: t-Statistic: 2.23; 
B: Recent portion of sample: Coefficient: 1.229[A]; 
B: Recent portion of sample: t-Statistic: 11.98. 

January effect; 
A: Full sample: Coefficient: 6.426[A]; 
A: Full sample: t-Statistic: 3.07; 
B: Recent portion of sample: Coefficient: 13.227[A]; 
B: Recent portion of sample: t-Statistic: 8.82. 

May effect; 
A: Full sample: Coefficient: 11.856[B]; 
A: Full sample: t-Statistic: 2.07; 
B: Recent portion of sample: Coefficient: 25.567[A]; 
B: Recent portion of sample: t-Statistic: 16.14. 

June effect; 
A: Full sample: Coefficient: 8.133[A]; 
A: Full sample: t-Statistic: 3.90; 
B: Recent portion of sample: Coefficient: [Empty]; 
B: Recent portion of sample: t-Statistic: [Empty]. 

September effect; 
A: Full sample: Coefficient: 10.776[A]; 
A: Full sample: t-Statistic: 4.98; 
B: Recent portion of sample: Coefficient: 14.328[A]; 
B: Recent portion of sample: t-Statistic: 14.50. 

Moving average error t-1; 
A: Full sample: Coefficient: 0.411[A]; 
A: Full sample: t-Statistic: 3.38; 
B: Recent portion of sample: Coefficient: [Empty]; 
B: Recent portion of sample: t-Statistic: [Empty]. 

Moving average error t-2; 
A: Full sample: Coefficient: [Empty]; 
A: Full sample: t-Statistic: [Empty]; 
B: Recent portion of sample: Coefficient: -0.961[A]; 
B: Recent portion of sample: t-Statistic: -24.95. 

Sample (adjusted): Included observations (after adjustments); 
December 2002 - December 2007: 61; 
June 2006 - December 2007: 19. 

Sample (adjusted): R-squared; 
December 2002 - December 2007: 0.718; 
June 2006 - December 2007: 0.976. 

Sample (adjusted): Adjusted R-squared; 
December 2002 - December 2007: 0.674; 
June 2006 - December 2007: 0.960. 

Sample (adjusted): S.E. of regression; 
December 2002 - December 2007: 5.352; 
June 2006 - December 2007: 2.060. 

Sample (adjusted): Durbin-Watson stat; 
December 2002 - December 2007: 2.148; 
June 2006 - December 2007: 1.720. 

Source: GAO analysis of Treasury data. 

Note: Estimated using Newey-West heteroskedasticity-and autocorrelation-
consistent standard errors and covariance. 

[A] Significant at the 1 percent level. 

[B] Significant at the 5 percent level. 

[End of table] 

As the table shows, first we estimated the relationship between cash 
holdings and volatility over the entire sample for which we compiled 
data, which runs from October 2002 through December 2007, truncated by 
2 months because of the inclusion of two lagged values of the 
volatility variable. Our estimates suggested that a structural change 
occurred in the relationship between cash holdings and volatility after 
the Medicare Part D program was fully operational in June 2006. 
[Footnote 49] Accordingly, we reestimated the relationship using data 
only for the more recent part of our sample, from June 2006 through 
December 2007.[Footnote 50] 

The recent-sample estimates suggest Treasury's cash holdings became 
much more responsive to volatility after Medicare Part D payments were 
fully phased in. The sum of the coefficients of the contemporaneous and 
lagged values of the volatility variable was 4.94 in the equation 
estimated using data from only the more recent portion of the sample 
compared to 2.76 in the equation estimated using data from the entire 
sample. We used these two sets of coefficients to derive an upper and 
lower bound on our estimate of the reduction in cash balances and the 
associated interest costs that might result from Medicare Part D 
payment realignments. 

Other variables usually hypothesized to affect cash holdings of firms 
and households were also tested for inclusion in the equation. These 
included withdrawals--a measure of expenditures--and the 3-month 
Treasury rate. The estimated coefficients of the other variables we 
tried were not statistically significant and were therefore excluded 
from the equation estimates.[Footnote 51] To address serial correlation 
of the error terms, we experimented with specifications involving 
autoregressive and moving average error terms. We found that only one 
moving average error term had a coefficient that was statistically 
significant at the .05 level--a first order term in the full sample 
estimate and a second order term in the more recent sample estimate. 
[Footnote 52] 

Interest Cost Reductions from Medicare Payment Realignments: 

We developed five different options for realigning Medicare Advantage 
and Part D plan payments. Instead of making these payments on the first 
of the month, options 1 through 5 would redistribute the payments as 
follows: 

Option 1: One payment on the 26th of the prior month. 

Option 2: Two payments, with half of that month's amount paid on the 
1ST and the other half on the 15th. 

Option 3: Two payments, with the first payment made on the 20TH of the 
prior month and the remainder paid on the 10th of the month of 
coverage. 

Option 4: Two retrospective payments, with the first payment made on 
the fourth Thursday of the month and the second payment on the second 
Thursday of the following month. 

Option 5: Weekly payments on Thursdays, each payment equal to 1/4 or 
1/5 of the monthly payment amount, depending on the number of Thursdays 
in the month. 

We then calculated how much each option would reduce volatility, as 
measured by the standard deviation of Treasury deposits less 
withdrawals, from the actual volatility level in CY 2007. The 
volatility reduction was then used in conjunction with the full-and 
recent-sample equation estimates relating cash balances to volatility 
shown in table 2 to calculate the implied reduction in Treasury's 
average monthly cash balance. Table 3 provides the resulting 
calculations. In long run equilibrium, the reduction in average monthly 
cash is equal to the change in volatility multiplied by the sum of the 
coefficients of the current and lagged values of the volatility 
measure. As noted above, for the estimate using the full sample 
(December 2002 through December 2007) the sum of the coefficients was 
2.76, and for the estimate based on the more recent period (June 2006 
through December 2007) the sum of the coefficients was 4.94, indicating 
that cash balances became more responsive to volatility recently after 
the full phase-in of the Medicare Part D program. Depending on the 
payment realignment option chosen, the volatility reductions suggest 
potential decreases in Treasury's average monthly cash balance ranging 
from $.72 billion to $.96 billion in 2007 based on the full-sample 
equation estimate and from $1.28 billion to $1.73 billion based on the 
recent-sample equation estimate. (See table 3.) 

Table 3: Estimated Reduction in Volatility, Cash Balance, and Interest 
Cost: 

Volatility (CY 2007 billion $)[A]: 
Option 1: $11.61; 
Option 2: $11.62; 
Option 3: $11.58; 
Option 4: $11.59; 
Option 5: $11.53. 

Volatility reduction (CY 2007 billion $)[B]; 
Option 1: $0.27; 
Option 2: $0.26; 
Option 3: $0.30; 
Option 4: $0.29; 
Option 5: $0.35. 

Full sample estimate: 

Cash balance reduction (CY 2007 billion $)[C]; 
Option 1: $0.75; 
Option 2: $0.72; 
Option 3: $0.83; 
Option 4: $0.80; 
Option 5: $0.96. 

Interest Cost Reduction: 

CY 2007 (million $)[D]; 
Option 1: $39.7; 
Option 2: $38.1; 
Option 3: $44.4; 
Option 4: $42.6; 
Option 5: $51.4. 

Cumulative FY 2009 - 2018 (million $)[E]; 
Option 1: $518.9; 
Option 2: $498.0; 
Option 3: $580.2; 
Option 4: $556.7; 
Option 5: $671.5. 

Recent sample estimate: 

Cash balance reduction (CY 2007 billion $)[C]; 
Option 1: $1.33; 
Option 2: $1.28; 
Option 3: $1.49; 
Option 4: $1.43; 
Option 5: $1.73. 

Interest Cost Reduction: 

CY 2007 (million $)[D]; 
Option 1: $71.0; 
Option 2: $68.1; 
Option 3: $79.4; 
Option 4: $76.2; 
Option 5: $91.9. 

Cumulative FY 2009 - 2018 (million $)[E]; 
Option 1: $928.4; 
Option 2: $890.9; 
Option 3: $1037.9; 
Option 4: $995.9; 
Option 5: $1201.3. 

Source: GAO analysis of Treasury data. 

[A] Volatility is the average of monthly values of the standard 
deviation of daily Treasury deposits minus withdrawals, excluding 
deposits and withdrawals related to debt issuances and redemptions. 

[B] Volatility reduction is each option's reduction from the monthly 
average actual 2007 level of 11.88. 

[C] Cash balance reduction equals the change in volatility times the 
sum of the coefficients of the current and lagged values of the 
volatility terms in the equation estimate in table 2. 

[D] Interest cost reduction for CY 2007 equals cash balance reduction 
times the average of 3-month and 10-year Treasury rates over the 20 
years from 1988 through 2007 (5.32 percent). 

[E] Interest cost reduction from FY 2009 through FY 2018 was 
extrapolated from the CY 2007reduction using the assumption that the 
annual interest reduction grows at the same rate as CBO's projection of 
total federal outlays. 

Note: Estimates do not reflect any potential offsetting effects. 

[End of table] 

Treasury's cash balance needs to be financed by a corresponding amount 
of outstanding Treasury debt. A reduction in Treasury's cash balance 
thus would permit a reduction in its debt and the associated interest 
payments. To evaluate the potential interest cost reduction for both 
samples we multiplied the estimated cash balance reduction by the 
average of 3-month and 10-year Treasury rates over the 20 years from 
1988 through 2007, which was 5.32 percent. We used an interest rate 
covering a longer term historical period in order to provide a 
generally representative estimate of the interest cost reduction that 
Treasury might achieve by reducing payment volatility. Based on the 
estimated volatility and cash balance reductions in 2007, Treasury's 1- 
year interest cost reduction ranges across options from $38.1 million 
to $51.4 million based on the full-sample equation estimate and from 
$68.1 million to $91.9 million based on the recent-sample estimate. The 
(higher) estimate from the more recent sample should be given greater 
consideration since it includes only the period during which Part D was 
in effect. 

In the final step of our analysis, we extrapolated the 1-year interest 
cost reduction estimate over the 10-year budget window from FY 2009 
through FY 2018 using the assumption that the reduction would grow at 
the same rate that CBO projects for total federal outlays. The lower 
range of our estimates suggests that realigning Medicare private plan 
payments could reduce interest costs between $498 million and $672 
million over the 10-year budget window from FY 2009 to FY 2018, 
depending on the realignment option chosen. The upper range of our 
estimates suggests that the same options could reduce interest costs 
between $891 million and $1,201 million ($1.2 billion) over the 10-year 
budget window. 

More precise 10-year estimates generated using methods similar to those 
used in our 1-year estimate are not feasible because 10-year 
projections of Treasury's daily receipts and expenditures are not 
available. Such daily projections would be needed to calculate 
volatility under the baseline and each of the five options over the 10- 
year budget window. Indexing the 1-year interest reduction to federal 
outlays therefore seemed to be a reasonably conservative alternative 
way of generating 10-year projections. One justification for this is 
that we found that there was a significant correlation between our 
volatility measure and total federal expenditures over our sample 
period. With CBO projecting that total expenditures will rise about 4 
percent annually over the 10-year budget window, volatility should also 
rise. Similarly, CMS projections suggest that Medicare prescription 
drug payments should rise about 10 percent annually over this period. 
Thus, projections for both total federal spending and for Medicare 
prescription drug payments suggest that volatility should increase in 
the future. The implication is that the potential size of volatility 
and interest cost reductions achievable through payment realignments 
should also increase. As noted, the 10-year interest cost reduction 
estimates provided in table 3 assume that the 1-year interest reduction 
increases at the same rate as total federal outlays. A more 
conservative approach of generating a long-run projection would be to 
simply multiply the 1-year interest reduction by 10. A more aggressive 
approach would be to increase the 1-year interest reduction at the rate 
that CMS projects Medicare prescription payments will increase-- 
approximately 10 percent per year. 

Limitations of Our Analysis: 

In addition to the uncertainty inherent in extrapolations based on 
statistical estimates, our estimates are subject to the limitation that 
they exclude potential offsets to interest cost reductions. The 
estimates represent the gross reduction in Treasury interest costs that 
could result from a realignment of Medicare payments. However, Medicare 
plans might raise their bids to CMS under some of the options we 
proposed, which would raise the overall cost of Medicare. In addition, 
our estimates do not reflect any of the offsetting interest income 
Treasury could earn on the additional cash it holds. However, 
Treasury's cash balance increments cannot always be seamlessly placed 
in interest-earning vehicles.[Footnote 53] 

To assess the reliability of data used in this study, we examined the 
data to look for outliers and anomalies and addressed such issues as 
appropriate. Where possible and appropriate, we corroborated the 
results of our data analysis with other sources. On the basis of our 
assessment we believe the data are reliable for the purposes of this 
review. 

[End of section] 

Appendix II: CMS's Estimates of the Impact of Alternative Payment 
Timing Options on Federal Medicare Payments to Plan Sponsors: 

The CMS OACT analyzed the impact of the alternative payment timing 
options we identified on federal Medicare MA and Part D payments. Table 
4 below shows the OACT estimates for the change in federal payments to 
the plan sponsors assuming that all of the change in sponsors' 
investment income was reflected in their plan bids. OACT noted that, 
because most of the impact from any gained or lost investment income 
would likely be reflected in plan sponsors' bids, the impact on federal 
payments would likely be a significant portion of the amounts shown 
below. 

Table 4: OACT Upper Bound Estimates of the Impact of Alternative 
Payment Timing Options on Federal Medicare Payments to Plan Sponsors 
(Dollars in millions): 

Payment Timing Option: Option 1: One payment on the 26th of the prior 
month; 
Maximum change in federal payments: (-$20). 

Payment Timing Option: Option 2: Two payments, with half of that 
month's amount paid on the 1st and the other half on the 15th; 
Maximum change in federal payments: 40. 

Payment Timing Option: Option 3: Two payments, with the first payment 
made on the 20th of the prior month and the remainder paid on the 10th 
of the month of coverage; 
Maximum change in federal payments: 0. 

Payment Timing Option: Option 4: Two retrospective payments, with the 
first payment made on the fourth Thursday of the month and the second 
payment on the second Thursday of the following month; 
Maximum change in federal payments: 120. 

Payment Timing Option: Option 5: Weekly payments on Thursdays, each 
payment equal to 1/4 or 1/5 of the monthly payment amount, depending on 
the number of Thursdays in the month; 
Maximum change in federal payments: $70. 

Source: CMS, Office of the Actuary. 

Note: Positive values represent higher Federal payments and negative 
values represent a reduction in Federal payments. We have not 
independently verified the estimates provided by OACT. 

[End of table] 

[End of section] 

Appendix III: Comments from the Department of the Treasury: 

Department Of The Treasury: 
Assistant Secretary: 
Washington, D.C. 

December 22, 2008: 

Ms. Susan J. Irving: 
Director for Federal Budget Analysis: 
Strategic Issues: 
United States Government Accountability Office: 
441 G. Street, N.W. 
Washington, DC 20548: 

Dear Ms. Irving: 

We appreciate the opportunity to review and comment on the Government 
Accountability Office's (GAO) draft report entitled, Debt Management: 
Treasury's Cash Management Challenges and Timing of Payments to 
Medicare Private Plans. The report recommends that the Secretary of the 
Treasury and the Administrator of the Centers for Medicare and Medicaid 
Services (CMS) expeditiously convene a joint inter-agency effort to 
study the options identified by GAO and any other options that would 
improve Treasury's ability to manage cash flow. 

We welcome your recommendation to work with CMS to review the five 
options presented in the report to align the payments to Medicare plan 
sponsors with the government's cash receipts. Given the growth in 
Medicare payments experienced since 2005 and the projections of 
continued growth, Treasury is very interested in finding a beneficial 
solution that improves cash and debt management while not unduly 
increasing the administrative burden for CMS. We welcome the 
opportunity to review each of our payment systems with CMS to determine 
which application best meets their needs and look forward to finding a 
solution that is in the best interests of the government. 

We appreciate the professional manner in which you and your team 
approached this engagement. 

Sincerely: 

Signed by: 

Kenneth E. Carfine: 
Fiscal Assistant Secretary: 

[End of section] 

Appendix IV: Comments from the Department of Health and Human Services: 

Department Of Health & Human Services: 
Office Of The Secretary
Assistant Secretary for Legislation: 
Washington, DC 20201: 

January 7, 2009: 

James Cosgrove: 
Director, Health Care: 
U.S. Government Accountability Office: 
441 G Street N.W. 
Washington, DC 20548: 

Dear Mr. Cosgrove: 

Enclosed are comments on the U.S. Government Accountability Office's 
(GAO) report entitled: "Debt Management: Treasury's Cash Management 
Challenges and Timing of Payments to Medicare Private Plans" (GAO 09-
118). 

The Department appreciates the opportunity to review this report before 
its publication. 

Sincerely, 

Signed by: 

Jennifer R. Luong, for: 

Craig Burton: 
Acting Assistant Secretary for Legislation: 

Attachment: 

Department Of Health & Human Services: 
Centers for Medicare & Medicaid Services
200 Independence Avenue SW: 
Washington, DC 20201: 

Date:	January 7, 2009: 

To: Craig Burton: 
Acting Assistant Secretary for Legislation: 
Office of the Secretary: 

From: [Signed by] Kerry Weems: 
Acting Administrator: 

Subject: Government Accountability Office (GAO) Draft Report: "Debt 
Management: Treasury's	Cash Management Challenges and Timing of 
Payments to Medicare Private Plans" (GAO-09-118): 

Thank you for the opportunity to review and comment on the GAO draft 
report entitled. "Debt Management: Treasury's Cash Management 
Challenges and Timing of Payments to Medicare Private Plans." The 
Centers for Medicare & Medicaid Services (CMS) understands that a 
timing difference between cash influx and outflows poses challenges for 
the Department of Treasury (Treasury). which in turn raises borrowing 
and interest costs. CMS is willing to work with Treasury to study 
options to address cash influx and outflow challenges. as the 
challenges relate to CMS. 

We look forward to working with GAO and Treasury in the future on the 
issues raised in this report. Our response to the recommendation and 
other comments on the draft report follow. 

GAO Recommendation: 

The GAO recommends the Secretary of Treasury and the Administrator of 
CMS convene a joint effort to study options to improve Treasury's 
ability to manage cash now and reduce interest costs while not unduly 
increasing administrative burden for CMS. 

CMS Response: 

The CMS agrees with the recommendation that it and Treasury work 
together to study options to improve Treasury's ability to manage cash 
flow and reduce interest costs while not unduly increasing CMS' 
administrative burden. 

[End of section] 

Footnotes: 

[1] See GAO, Debt Management: Treasury Has Refined Its Use of Cash 
Management Bills but Should Explore Options That May Reduce Cost 
Further, [hyperlink, http://www.gao.gov/products/GAO-06-269] (Mar. 30, 
2006); GAO, Debt Management: Treasury Has Improved Short-Term 
Investment Programs, but Should Broaden Investments to Reduce Risks and 
Increase Return, [hyperlink, http://www.gao.gov/products/GAO-07-1105] 
(Sept. 20, 2008); and GAO, Federal Debt: Answers to Frequently Asked 
Questions, An Update, [hyperlink, 
http://www.gao.gov/products/GAO-04-485SP] (August 2004). 

[2] As discussed later in this report, Treasury's cash management 
challenges are also complicated by the fact that Treasury needs to hold 
precautionary cash balances to avoid an overdraft because the Federal 
Reserve is not authorized to lend directly to Treasury. 

[3] Medicare is the federally financed health insurance program for 
persons aged 65 and over, certain individuals with disabilities, and 
individuals with end-stage renal disease. 

[4] Medicare FFS consists of Part A of title XVIII of the Social 
Security Act, which covers inpatient stays, care in skilled nursing 
facilities, hospice care, and some home health care; and Part B, which 
covers certain physician, outpatient hospital, and laboratory services, 
among other services. MA plans operate under Part C of the Social 
Security Act. 

[5] The Medicare Prescription Drug, Improvement, and Modernization Act 
of 2003, Pub. L. No. 108-173, 117 Stat. 2066, created the Medicare 
prescription drug program (Part D of title XVIII of the Social Security 
Act), and changed the name of the Medicare+Choice program to Medicare 
Advantage. 

[6] In general, a person enrolled in an MA plan that also offers Part D 
coverage may not enroll in a PDP. See the Social Security Act, §1860D- 
1(a)(1)(B). 

[7] These plans had a range of characteristics. They included a rural 
plan, a stand-alone drug plan, and two plans that receive Medicare 
payments exceeding $1 billion per month each in 2007. 

[8] Calendar days. 

[9] Changes have been made to the timing of Social Security benefit 
payments for those who began drawing benefits after 1997. The changes 
are expected to reduce the size of these payments over time. See 
discussion later in this section. 

[10] See [hyperlink, http://www.gao.gov/products/GAO-06-269]. 

[11] Until October 2008, Treasury was only permitted to invest its 
excess cash balances in depository institutions and in obligations of 
the U.S. government. Our review found that Treasury had improved its 
short-term investment programs but needed to broaden its investments to 
reduce risks and increase returns. Treasury had three short-term 
investment programs for investment of excess cash balances: the TT&L 
(Treasury Tax and Loan) program; the Term Investment Option (TIO) 
offerings; and limited repurchase agreements (repo). A repo, or 
repurchase agreement, is a form of short-term collateralized borrowing 
used by dealers in government securities. Interest in TT&L investments 
is set at the federal funds rate minus 25 basis points. In 2003, 
Treasury established the TIO as a permanent program to improve returns. 
In 2006, Treasury introduced a temporary repo pilot, which allowed it 
to earn near-market rates of return. We recommended that if provided 
the authority to do so, the Secretary of the Treasury implement a 
permanent expanded repo program that could permit Treasury to earn a 
higher rate of return, expand investment capacity, and reduce 
concentration risk. Subsequent to the completion of our analysis, 
section 502 of Pub. L. No. 110-351 (Oct. 7, 2008) amended section 323 
of Title 31, U.S. Code, to authorize the Secretary of Treasury to 
establish a permanent repo program. 

[12] For example, in 2007 we reported that over the past couple of 
years, Treasury had invested almost half of its TT&L deposits with one 
depository institution. The TIO shares the same concentration risk and 
raises capacity concerns in part because through 2006 TIO funds were 
concentrated in two TIO participants. 

[13] The TGA is the single account into which the funds that flow 
through the federal government's accounts are rolled up at the end of 
the day. The accounts are maintained at the 12 Federal Reserve banks. 

[14] See [hyperlink, http://www.gao.gov/products/GAO-07-1105], appendix 
III, for a historical overview of these issues. In the mid-1970s, 
Treasury kept the bulk of its cash in the TGA account. On some 
occasions the Federal Reserve was unable to offset the large swings in 
the TGA balance through temporary open market operations, and it had to 
request that Treasury redeposit funds in its TT&L accounts to avoid 
having to make outright purchases of securities in the secondary 
market. Treasury has had statutory authority to invest in TT&L notes 
with depository institutions since 1977. 

[15] Several plan sponsors have multiple contracts. The number of 
payments made each month thus exceeds the number of plan sponsors. 
According to CMS, over 750 separate contract payments occur each month, 
and this number will grow to an estimated 900 contract payments in 
2009. 

[16] Payments for both Part C and Part D include beneficiary premium 
amounts that are withheld from Social Security benefits. Beneficiaries 
subject to MA or Part D premiums may choose to either reimburse the 
plans directly or have the premiums deducted from their Social Security 
checks. The premiums deducted from the Social Security checks are 
transferred to the Medicare trust funds and then transferred from the 
trust funds to the plans. 

[17] See 42 C.F.R.§422.100(c)(2007). Additional benefits may, for 
example, include coverage for vision and hearing services; reductions 
in cost sharing--the amount a beneficiary pays for covered services; 
and reductions in the premiums that many Medicare FFS beneficiaries 
must pay for coverage for outpatient services and outpatient drugs. 

[18] Beneficiaries enrolled in an MA plan that does not offer Part D 
coverage have limited opportunities to enroll in a stand-alone 
prescription drug plan. 

[19] The catastrophic coverage phase begins when a beneficiary's out- 
of-pocket costs reach $5,726 (in 2008). At that point, beneficiaries 
contribute approximately 5 percent coinsurance toward their drug costs, 
the Part D sponsors pay approximately 15 percent, and Medicare pays 80 
percent. 

[20] When the first of the month falls on a holiday or weekend, payment 
is made on the previous business day. 

[21] See Social Security Act §§ 1853(a)(1), 1860D-15(a). This schedule 
for making plan payments reflects historical and standard practice. 

[22] Other types of plans include provider sponsored organizations, 
Medical Savings Accounts, and regional PPOs. 

[23] Under capitation, plan sponsors pay a fixed amount for each 
enrollee assigned to the provider irrespective of the number of covered 
services provided. 

[24] See 42 CFR § 422.520. Network contracted providers are not subject 
to federal prompt payment rules but instead are governed by the payment 
timing provisions of their contract terms. 

[25] This requirement will not apply to pharmacies that dispense drugs 
by mail order only or are located in, or contract with, a long-term 
care facility. See Medicare Improvements for Patients and Providers Act 
of 2008, Pub. L. No. 110-275, § 171, 122 Stat. 2494, 2578-80. 

[26] See Figure 1. 

[27] Calendar days. 

[28] As discussed in our 2007 report, the coefficient of variation is 
one measure of cash flow volatility. This measure is calculated by 
dividing the standard deviation by the mean, and a larger percentage 
indicates greater volatility. The coefficient of variation of 
Treasury's daily operating cash balances was 80 percent in both FY 2006 
and 2007, compared to 60 percent in FY 2003. 

[29] The Treasury Borrowing Advisory Committee of the Securities 
Industry and Financial Markets Association was chartered under the 
Federal Advisory Committee Act, as amended, and is comprised of 14 
members who represent securities firms, banks, and investor groups. The 
Committee's members are nominated by the Chairman of the Committee, in 
coordination with Treasury, are selected in coordination with the 
Chairman of the Committee and Treasury, and approved by Treasury. 
Following this meeting, Treasury reintroduced a 52-week bill; regularly 
scheduled auctions for the bill take place every 4 weeks on Thursdays. 
For minutes of the Committee's April 28, 2008, meeting, see [hyperlink, 
http://www.treas.gov/press/releases/hp1002.htm] (accessed on June 17, 
2008). 

[30] Payments to Medicare fee-for-service providers are made daily as 
claims are paid, including on the first of the month. In CY 07, a total 
of $134 billion Medicare payments were made in first-of-month payments; 
$120 billion, or about 90 percent, of this total was made to Medicare 
health plans. 

[31] That is, in months where the 1st of the month fell on a weekday, 
in which case the Medicare payments to plans were made on the 1st. 
Where the 1st fell on a weekend or holiday, the Medicare payment date 
rolled back to the immediately preceding workday. Cash payments are net 
of debt transactions (i.e., debt redemptions and issuances). 

[32] Medicare spending on the MA program has grown rapidly in recent 
years due to increases in both payment rates and enrollment. See GAO, 
Medicare Advantage: Higher Spending Relative to Fee-for-Service May Not 
Ensure Lower Out-of-Pocket Costs for Beneficiaries, GAO-08-522T (Feb. 
28, 2008). 

[33] CBO's estimates are from its March 2008 baseline. 

[34] GAO analysis of CMS's calendar year estimates. This analysis 
assumes that payments are evenly distributed throughout the year. CMS's 
estimates reflect the Medicare Trustees' 2008 intermediate assumptions. 

[35] The Medicare Improvements for Patients and Providers Act of 2008 
(MIPPA), Pub. L. No. 110-275, 122 Stat. 2494, became law on July 15, 
2008. 

[36] MA plans provide both Part A and Part B benefits, which are paid 
from the Hospital Insurance (HI) and Supplementary Medical Insurance 
(SMI) Trust Funds. Part D benefits are paid from the Part D account in 
the SMI Trust Fund. 

[37] The study determined the time between the date of claim 
adjudication (the date the plan approves the drug claim is usually the 
dispensing date) and the date the pharmacy received payment from the 
Part D plan. See M. Shepherd, K. Richards, and A. Winegar, Length of 
Prescription Drug Payment Times by Medicare Part D Plans, (Austin, 
Texas: Center for Pharmacoeconomic Studies: The University of Texas at 
Austin, August 2007). 

[38] Remarks of CMS Administrator Mark B. McClellan delivered to the 
National Community Pharmacists Association 38th Legislation and 
Government Conference, May 22, 2006. 

[39] This option follows the current payment schedule for community- 
rated plans in the Federal Employees Health Benefits Program (FEHBP). 

[40] As discussed earlier in this report, under Treasury's regular 
auction schedule, bills are settled on Thursdays. 

[41] Our estimates suggest that making weekly payments on Thursdays 
yielded the largest potential for interest cost reductions, and the 
option of paying on the 1st and the 15th yielded the smallest. 

[42] See discussion later in this report for the views of CMS's Office 
of the Actuary on possible plan responses. 

[43] Treasury also began reissuing regular 52-week bills in June 2008. 

[44] Because premiums paid by beneficiaries in Medicare FFS are tied to 
both Medicare FFS and MA program spending, additional payments to MA 
plan sponsors result in higher premiums for all Medicare beneficiaries. 

[45] OACT estimated a decrease in federal Medicare payments under the 
option that would shift all sponsor payments to the 26th of the prior 
month; and it estimated the largest increase in federal Medicare 
payments for the option that would make two retrospective payments. 

[46] We use the terms "net deposit volatility" or "volatility" to refer 
to the standard deviation of daily deposits less withdrawals. 

[47] Congressional Budget Office, An Analysis Of The President's 
Budgetary Proposals For Fiscal Year 2009 (March 2008), Table A-1, p. 
44. 

[48] The variables excluded from the equation had estimated 
coefficients that were not significant at the .05 level. 

[49] A Chow-test shows that the null hypothesis of no structural break 
at June 2006 can be rejected at the .05 level of significance (the p- 
value for the F statistic was .0207). 

[50] ADF tests applied to the cash balance and volatility measures 
allow the rejection of the null hypothesis of a unit root at the.05 
level, which indicates that the variables are stationary and that 
applying OLS to their levels is appropriate. 

[51] The variables excluded from the equation had estimated 
coefficients that were not significant at the .05 level. 

[52] With the inclusion of the MA term in each equation, a Breusch- 
Godfrey test did not permit rejection of the null hypothesis that the 
residuals are not serially correlated at the .05 level of significance. 

[53] As noted in our report, following completion of our analysis, 
section 502 of Pub. L. No. 110-351 (Oct. 7, 2008) amended section 323 
of Title 31, U.S. Code, to authorize the Secretary of Treasury to 
establish a permanent repo program. 

[End of section] 

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