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entitled 'Debt Collection Improvement Act Of 1996: HHS's Centers for 
Medicare & Medicaid Services Faces Challenges to Fully Implement 
Certain Key Provisions' which was released on February 22, 2002. 

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United States General Accounting Office: 
GAO: 

Report to the Chairman, Subcommittee on Government Efficiency, 
Financial Management and Intergovernmental Relations, Committee on 
Government Reform, House of Representatives: 

February 2002: 

Debt Collection Improvement Act Of 1996: 

HHS's Centers for Medicare & Medicaid Services Faces Challenges to 
Fully Implement Certain Key Provisions: 

GAO-02-307: 

Contents: 

Letter: 

Results in Brief: 

Background: 

Objectives, Scope, and Methodology: 

CMS Did Not Promptly Refer All Eligible Medicare Debts in Fiscal Year 
2001: 

CMS Lacked Effective Processes and Controls to Promptly Refer Eligible 
Medicare Debts: 

CMS Faces Challenges in Effectively Managing Future Medicare Debt 
Referrals: 

CMS Does Not Provide Reliable Medicare Debt Information to Treasury: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix: 

Appendix I: Comments from the Centers for Medicare & Medicaid Services: 

Table: 

Table 1: CMS Medicare Debts Eligible for Referral as of September 30, 
2000: 

[End of section] 

United States General Accounting Office: 
Washington, D.C. 20548: 

February 22, 2002: 

The Honorable Stephen Horn: 
Chairman: 
Subcommittee on Government Efficiency, Financial Management and 
Intergovernmental Relations: 
Committee on Government Reform: 
House of Representatives: 

Dear Mr. Chairman: 

On October 10, 2001, we testified before your subcommittee on 
agencies' implementation of the Debt Collection Improvement Act (DCIA) 
of 1996.[Footnote 1] One of the major purposes of DCIA is to maximize 
collection of billions of dollars of nontax delinquent debt owed to 
the government. Toward this end, DCIA requires that agencies refer 
eligible debts delinquent more than 180 days that they have been 
unable to collect to the Department of the Treasury for payment offset 
and to Treasury or a Treasury-designated debt collection center for 
cross-servicing. Treasury performs payment offset through its Treasury 
Offset Program (TOP), which includes the offset of certain benefit 
payments, vendor payments, and tax refunds. Cross-servicing involves 
such actions as locating debtors, issuing demand letters, and 
referring debts to private collection agencies. 

As you know, we testified on (1) problems we identified in selected 
federal agencies' processes and controls for identifying and referring 
eligible debts to Treasury's Financial Management Service (FMS) for 
collection action, (2) obstacles that hampered agencies from promptly 
referring eligible debts, and (3) problems we identified related to 
the appropriateness of exclusions from referral requirements. 

This report provides additional detail on the Centers for Medicare & 
Medicaid Services' (CMS)[Footnote 2] progress in implementing the debt-
referral requirements of DCIA to collect delinquent Medicare debts and 
includes several recommendations.[Footnote 3] Collection of delinquent 
Medicare debts is particularly critical because they represented a 
significant portion—about 9 percent—of the approximately $58 billion 
of reported delinquent nontax debts governmentwide as of September 30, 
2000, and continue to represent a large amount. 

In September 2000, we reported that the Health Care Financing 
Administration (HCFA), now known as CMS, had not fully implemented the 
referral provision of DCIA.[Footnote 4] The agency had implemented 
pilot referral projects for its two major types of Medicare debt: (1) 
Medicare Secondary Payer (MSP) debts, for which insurance or other 
entities are primarily financially responsible and CMS is seeking 
reimbursement, and (2) other debts, referred to as non-MSP debts. CMS 
was referring delinquent Medicare debts to the Department of Health 
and Human Services' (HHS) Program Support Center (PSC), a Treasury-
designated debt collection center for certain HIS debts. However, we 
reported that under the pilot projects, contractors referred only 
older, large-dollar-value Medicare debts, thereby excluding from 
referral a significant amount of debt and, in particular, more recent, 
lower-dollar-value claims. Collection industry statistics indicate 
that low-dollar-value and current debts are typically easier to 
collect than large-dollar-value and older debts. In the September 2000 
report, we recommended that CMS (1) immediately refer all Medicare 
debts to PSC as soon as they become more than 180 days delinquent and 
are determined to be eligible for referral and (2) refer the backlog 
of eligible debts as quickly as possible. 

For this report, we were to follow up to determine whether (1) CMS was 
promptly referring eligible Medicare debts for collection action, (2) 
any obstacles were hampering CMS from referring eligible Medicare 
debts, and (3) CMS was appropriately using exclusions from referral 
requirements.[Footnote 5] At the time of our review, the HHS Office of 
Inspector General (OIG) was conducting detailed testing of CMS's 
implementation of DCIA and the effectiveness of CMS's debt collection 
and debt management activities. According to an OIG official, the 
OIG's report on its findings is scheduled for release in March 2002. 
As part of its work, the OIG tested selected debts to determine 
whether CMS appropriately categorized their status, including their 
exclusion status (e.g., in bankruptcy, under appeal). Therefore, as 
agreed with your office, we did not test whether selected CMS debts 
had been reasonably excluded from referral, and we reached no overall 
conclusion about the appropriateness of CMS exclusions. During the 
course of our review, however, we did make several observations 
concerning the accuracy of the exclusion and debt-eligible amounts 
that CMS reported to Treasury as of September 30, 2000. 

Results in Brief: 

CMS made progress in referring eligible delinquent debts for 
collection during fiscal year 2001. Much of the referral volume was 
late in the year, however, and substantial unreferred balances 
remained as of September 30, 2001. PSC records indicate that in fiscal 
year 2001 CMS referred about $2.1 billion of non-MSP debts, out of 
approximately $2.6 billion of non-MSP debts reported as eligible for 
referral as of September 30, 2000. The vast majority of the referrals 
were made from June through September 2001. CMS made far less progress 
in its referral of eligible MSP debts, despite the fact that PSC has 
been more successful in collecting MSP debts than nonMSP debts. In 
fiscal year 2001, PSC records indicate that CMS referred only about 
$47 million, or about 3 percent, of the approximately $1.8 billion of 
MSP debts that were reported as eligible for referral as of September 
30, 2000. 

Inadequate procedures and controls hampered prompt identification and 
referral of both eligible non-MSP and MSP debts. The delayed referral 
of non-MSP debts resulted from problems with the CMS debt-referral 
system and insufficient CMS monitoring of contractor referrals. The 
low level of MSP debt referrals resulted primarily from limited 
contractor efforts and insufficient CMS monitoring of contractor 
performance. Further, many of the MSP debts will never be referred to 
PSC because CMS instructed its Medicare contractors to methodically 
close out MSP debts delinquent more than 6 years and 3 months. CMS 
also lacks procedures for reporting such closed-out debts to the 
Internal Revenue Service (IRS) as taxable income. 

With the expansion of the referral program during fiscal year 2001 to 
include all of CMS's Medicare contractors, CMS faces challenges to its 
ability to effectively manage Medicare debts in the future. The agency 
lacks a comprehensive database for all MSP debts, accurate information 
in the non-MSP debt-tracking systems, and a comprehensive written 
referral plan for all eligible Medicare debts. 

In addition, although as noted above we did not test whether selected 
CMS debts had been reasonably excluded from referral and reached no 
overall conclusion about the appropriateness of CMS exclusions, we 
found that CMS did not report reliable Medicare debt information to 
Treasury as of September 30, 2000. The agency inadvertently overstated 
the amount of debt referred for collection action and incorrectly 
reported the delinquency aging for certain debts and the amount of 
debt excluded from referral requirements. 

While CMS has taken positive steps to increase referrals of delinquent 
Medicare debts, substantial room for improvement remains. The 
recommendations in this report urge CMS to more stringently administer 
delinquent Medicare debt consistent with DCIA, Treasury expectations, 
and the agency's fiduciary responsibilities. 

CMS agreed with five of the six recommendations in this report but did 
not agree to assess the collectibility of older closed-out debts. In 
support of its position, CMS said further collection work would not be 
cost-effective in light of the age of these debts and the efforts and 
associated costs of our recommended follow-up work. We continue to 
believe that this assessment should be performed because CMS did not 
complete adequate collection work to justify discontinuing collection 
activity on these debts. 

Background: 

CMS, an operating division of HHS, administers Medicare, Medicaid, and 
the State Children's Health Insurance Program. As administrator of 
Medicare, which paid about $215 billion in benefits to approximately 
39.5 million Medicare beneficiaries in fiscal year 2000, CMS is the 
nation's largest health insurer. Although most participating providers 
comply with Medicare billing rules, inadvertent errors or intentional 
misrepresentations that result in overpayments to providers do occur. 
These overpayments represent money owed back to Medicare. According to 
the HCFA Financial Report for Fiscal Year 2000,[Footnote 6] about $8.0 
billion out of $8.1 billion of the debts reported owed to CMS 
originated in the Medicare program. 

MSP and Non-MSP Medicare Debts: 

CMS Medicare debts consist largely of overpayments to hospitals, 
skilled nursing facilities, physicians, and other providers of covered 
services and supplies under Part A (hospital insurance) and Part B 
(supplemental medical insurance) of the Medicare program. We examined 
two types of Medicare debts: 

* Medicare secondary payer (MSP) debts. MSP debts arise when Medicare 
pays for a service that is subsequently determined to be the financial 
responsibility of another payer. Cases that result in MSP debts 
include those in which beneficiaries have (1) other health insurance 
furnished by their employer or their spouse's employer (or, in certain 
instances, another family member) that covers the medical services 
provided, (2) occupational injuries, illnesses, and conditions covered 
by workers' compensation, and (3) injuries, illnesses, and conditions 
related to a liability or no-fault insurance settlement, judgment, or 
award. 

* Non-MSP debts. Although Medicare is phasing out this payment method, 
Medicare has paid certain institutional providers interim amounts 
based on their historical service to beneficiaries. Medicare 
contractors retrospectively adjust these payments based on their 
review of provider costs. When a provider's cost-reporting year is 
over, the provider files a report specifying its costs of serving 
Medicare beneficiaries. Cost report debts arise when the cost report 
settlement process, which includes audits and reviews by Medicare 
contractors, determines that the amount an institution was paid based 
on its cost report exceeds the final settlement amount. Another type 
of non-MSP debt related to cost reporting is unfiled cost report debt. 
If an institutional provider fails to submit a timely cost report, CMS 
establishes an unfiled cost report debt. The amount of the debt equals 
the full amount disbursed for the year in which the provider failed to 
submit a timely report. Most providers have an ongoing business 
relationship with the Medicare program; therefore, contractors are 
able to collect most non-MSP debts by offsetting subsequent Medicare 
payments to providers. However, if offsetting subsequent payments does 
not fully liquidate the debt (e.g., because the provider has left the 
Medicare program), unpaid balances more than 180 days delinquent are 
subject to DCINs debt-referral requirements. 

Collection Services for CMS Medicare Debts: 

CMS refers its eligible MSP and non-MSP debts to PSC, which provides 
debt management services for certain HHS operating divisions. Under 
DCIA, federal agencies are required to refer all eligible debts that 
are more than 180 days delinquent to Treasury or a Treasury-designated 
debt collection center. In 1999, Treasury designated PSC a debt 
collection center for HHS, allowing PSC to service certain debts, 
including MSP and unfiled cost report debts. PSC is responsible for 
attempting to collect MSP debts, obtaining cost reports for unified 
cost report debts, reporting MSP and unfiled cost report debts to TOP, 
and referring other types of Medicare debts to Treasury's FMS for 
cross-servicing. 

Prior Findings on CMS's Implementation of DCIA: 

In September 2000, we reported that CMS was slow to implement DCIA but 
could increase Medicare overpayment collections if it fully 
implemented the referral requirements of the act. We recommended, and 
CMS agreed, that CMS fully implement DCIA by transferring Medicare 
debts to PSC or Treasury for collection as soon as they became 
delinquent and were determined to be eligible. We also recommended 
that CMS refer the backlog of eligible Medicare debts to PSC as 
quickly as possible.[Footnote 7] 

We noted in the report that CMS had two pilot projects under way that 
were designed to expedite the transfer of delinquent Medicare debts 
for collection action. One pilot covered certain MSP debts valued at 
$5,000 or more, and the other covered certain non-MSP debts, primarily 
related to cost report audits, of $100,000 or more.[Footnote 8] 
Contractors participating in the pilots were to (1) verify the amount 
of a delinquent debt and ensure that it was still uncollected, (2) 
issue a DCIA intent letter indicating that nonpayment would result in 
the debt's referral to PSC, and (3) record the debt in a central CMS 
database used to transmit the debt to PSC for collection.[Footnote 9] 
CMS's goal is to have referred all eligible Medicare debts for 
collection action by the end of fiscal year 2002. 

CMS Medicare Debts Eligible for Referral as of September 30, 2000: 

As shown in table 1, CMS reported that about $6.6 billion of Medicare 
debts were more than 180 days delinquent or classified as currently 
not collectible (CNC) as of September 30, 2000. This information was 
reported in the Medicare Trust Fund Treasury Report on Receivables Due 
from the Public (TROR), which contained the most recent agency-
certified information available during our review. Debts classified as 
CNC are written off the books for accounting purposes—that is, they 
are no longer carried as receivables. A write-off does not extinguish 
the underlying liability for a debt, and collection actions may 
continue to be taken on debts classified as CNC. 

Of the $6.6 billion of Medicare debts reported as more than 180 days 
delinquent or classified as CNC, CMS reported that it had referred 
approximately $2 billion of debts and had excluded from referral 
approximately $1.8 billion of debts. CMS also reported in the TROR 
that about $1.6 billion in unfiled cost reports were delinquent more 
than 180 days. Because CMS does not recognize amounts associated with 
unfiled costs reports as receivables for financial reporting purposes, 
the agency reports unfiled cost report debts more than 180 days 
delinquent as a separate, additional item in the TROR.[Footnote 10] 
With these exclusions and additions, CMS reported about $6.4 billion 
of Medicare debts eligible for referral to PSC for collection action 
as of September 30, 2000. 

Table 1: CMS Medicare Debts Eligible for Referral as of September 30, 
2000 (Dollars in millions): 

Debts more than 180 days delinquent and debts classified as CNC: 
Debt amounts: $6,604. 

Plus: other delinquent debts (unfiled cost reports): 
Debt amounts: $1,591. 

Less: debts excluded from referral because of bankruptcy, appeals, 
litigation: 
Debt amounts: $1,809. 

Debts eligible for referral for collection action 6,386 Debts 
referred[A] for collection action: 
Debt amounts: $2,046. 

Debts eligible but not referred for collection action: 
Debt amounts: $4,340. 

[A]PSC reported that CMS had referred about $1.65 billion of 
delinquent debt as of September 30, 2000. We noted that CMS 
inadvertently overstated debt referrals by $67 million because of a 
data-entry error. In addition, during our review, a PSC official 
stated that PSC was reconciling the debts reported as referred by CMS 
to the debts reported as being received by PSC for collection action. 

Source: Medicare Trust Fund Treasury Report on Receivables Due from 
the Public for fourth quarter 2000 (September 30, 2000). 

[End of table] 

Of the approximately $6.4 billion of Medicare debts that CMS had 
reported as eligible for referral by the end of fiscal year 2000, the 
agency reported that about $4.3 billion of the debts had not been 
referred to Treasury or a Treasury-designated debt collection center. 
About $2.6 billion of the unreferred amount was non-MSP debt, and the 
remainder was MSP debt. 

CMS's goal for fiscal year 2001, which the agency met, was to refer an 
additional $2 billion of unreferred eligible debts. CMS's goal for 
fiscal year 2002 is to refer the remainder of eligible Medicare debts. 

Objectives, Scope, and Methodology: 

Our objectives were to determine whether (1) CMS was promptly 
referring eligible Medicare debts for collection action, (2) any 
obstacles were hampering CMS from referring eligible Medicare debts, 
and (3) CMS was appropriately using exclusions from referral 
requirements. 

Although CMS also administers Medicaid and the State Children's Health 
Insurance Program, we limited our review to Medicare debts because the 
Medicare program is the source of the vast majority of CMS's reported 
delinquent debt. 

To address our objectives, we obtained and analyzed the Medicare Trust 
Fund TROR for the fourth quarter of fiscal year 2000, which was the 
most recent agency-certified report available at the completion of our 
fieldwork, and other financial reports prepared by CMS. The most 
recent year-end TROR should contain the most reliable information 
available because Treasury requires that agency chief financial 
officers (or their designees) certify year-end data as accurate. We 
interviewed CMS and PSC officials to obtain an understanding of the 
debt-referral process and any obstacles that may be hampering referral 
of eligible debts. In addition, we reviewed CMS policies and 
procedures on debt referrals and examined current and planned CMS 
efforts to refer eligible delinquent debts. 

We also met with representatives from 4 selected CMS contractors that 
process and pay Medicare claims, and we discussed how they identified 
and referred eligible Medicare debts to PSC. At the time of our 
review, CMS had 55 Medicare contractors that processed claims and 
collected on overpayments. We used two criteria to select the 4 
contractors: (1) the size of their debt portfolio and (2) whether the 
contractor participated in the CMS pilot projects. Specifically, 1 of 
the selected contractors had the largest amount of debt overall and 
the largest amount of Part A debt, 1 other selected contractor had the 
largest amount of Part B debt, and another of the selected contractors 
had the largest amount of MSP debt. We selected the fourth contractor 
to ensure that our review covered at least one-third of all the debt 
maintained at the CMS contractors. Three of the 4 contractors that we 
selected participated in the MSP pilot project, and 2 participated in 
the non-MSP pilot project. 

As agreed with your office, we did not test selected debts that were 
excluded from referral because the HHS OIG was performing detailed 
testing of CMS's implementation of DCIA and the effectiveness of its 
debt collection and debt management activities. As part of its work, 
the OIG tested selected debts at CMS and its Medicare contractors to 
determine whether the status of debts had been appropriately 
categorized. We also did not independently verify the reliability of 
certain information that CMS and PSC provided (e.g., debts reported as 
more than 180 days delinquent). 

We performed our work from November 2000 to September 2001 in 
accordance with U.S. generally accepted government auditing standards. 

We requested written comments on a draft of this report from the 
administrator of CMS or his designated representative. CMS's letter is 
reprinted in appendix I. We also considered, but did not reprint, the 
technical comments provided with CMS's letter and have incorporated 
them throughout this report, where appropriate. 

CMS Did Not Promptly Refer All Eligible Medicare Debts in Fiscal Year 
2001: 

Overall, CMS did not promptly refer all of its reported eligible 
Medicare debts in fiscal year 2001. Although CMS referred 
approximately $2.1 billion of Medicare debts during the year, almost 
all were non-MSP debts primarily related to cost report audits. 
Further, the vast majority of these debt referrals—about $1.9 billion—
occurred late in the fiscal year, from June through September. While 
approximately $1.8 billion of eligible MSP debts were reported as 
eligible for referral as of September 30, 2000, CMS referred only 
about $47 million of MSP debts in fiscal year 2001. 

CMS Referred a Significant Amount of Non-MSP Debts in Fiscal Year 
2001, but Not Promptly: 

CMS made progress in referring non-MSP debts to PSC during fiscal year 
2001, but most of the progress occurred late in the fiscal year. 
Problems with the debt-referral system contributed to the late 
referral of non-MSP debts. Although CMS reached its $2 billion 
referral goal for fiscal year 2001, both the prospects for collection 
during the year and the collectibility of the debts were likely 
diminished by the referral delays. 

At the end of fiscal year 2000, about $2.6 billion of non-MSP debts 
remained to be referred. Throughout most of fiscal year 2001, CMS made 
little progress in referring these debts. It was not until June 2001, 
approximately two-thirds of the way through the fiscal year, that CMS 
began making substantial referrals of non-MSP debts to PSC. Of the 
approximately $2.1 billion of non-MSP debts reported as being referred 
during fiscal year 2001, CMS referred about $1.9 billion of the debts 
from June through September. 

CMS officials stated that they were not significantly concerned by the 
low level of non-MSP debt referrals during the first two-thirds of 
fiscal year 2001 because they met their goal of referring $2 billion 
of eligible Medicare debts in fiscal year 2001 and they intend to meet 
their goal of referring the remaining eligible debts by the end of 
fiscal year 2002. However, the prompt referral of delinquent debts is 
critical because, as industry statistics indicate, the likelihood of 
recovering amounts owed on delinquent debts decreases dramatically as 
the age of the debt increases. 

CMS Made Little Progress in Referring MSP Debts in Fiscal Year 2001: 

CMS made little progress in referring the approximately $1.8 billion 
of MSP debts that were reported as eligible for referral as of 
September 30, 2000. Limited contractor efforts, coupled with 
inadequate monitoring of contractor performance by CMS, contributed to 
the slow progress. In addition, many existing MSP debts will never be 
referred because in February 2001 CMS instructed its Medicare 
contractors to close out MSP debts delinquent more than 6 years and 3 
months, thereby terminating all collection efforts on such debts. 

Unreferred MSP debts represented about 40 percent of the approximately 
$4.3 billion of reported eligible Medicare debts that had not been 
referred for collection as of September 30, 2000. PSC collection 
reports show that the center has had comparatively more success in 
collecting MSP debts than it has had in collecting non-MSP debts. By 
the end of fiscal year 2001, PSC reported collecting almost as much on 
delinquent MSP debts as on delinquent non-MSP debts, even though the 
total dollar amount of MSP referrals was a small fraction, about 2 
percent, of the total dollar amount of non-MSP referrals.[Footnote 11] 

CMS began referring MSP debts to PSC in March 2000. PSC records 
indicate that through September 30, 2001, CMS had referred only about 
$83 million, or 5 percent, of the approximately $1.8 billion of MSP 
debts eligible for referral to PSC as of September 30, 2000. Of this 
amount, about $47 million was referred in fiscal year 2001. These 
limited referrals were likely the only collection action taken on most 
of the eligible MSP debts from March 2000 through September 2001. In 
most cases, CMS instructed its contractors only to send initial demand 
letters to MSP debtors and follow up on any resulting inquiries. 

CMS Lacked Effective Processes and Controls to Promptly Refer Eligible 
Medicare Debts: 

CMS did not establish and implement effective controls to promptly 
refer eligible Medicare debts to PSC for collection action. CMS failed 
to promptly refer non-MSP debts because the agency had problems with 
its debt-referral system. Limited contractor efforts, coupled with 
inadequate CMS monitoring of contractor performance, were primarily 
responsible for the slow progress in referring MSP debts. Because of a 
CMS policy to close out debts delinquent more than 6 years and 3 
months, some debts will never be referred for collection action. In 
addition, CMS has not developed a process to report closed-out debts 
to IRS, even though discharged debt is considered income and may be 
taxable. 

Problems with the Debt-Referral System Delayed the Referral of Non-MSP 
Debts: 

Non-MSP debt referrals were delayed until late in fiscal year 2001 
primarily because CMS suspended its debt-referral system in November 
2000. According to a CMS official responsible for non-MSP debt 
referrals, the agency suspended the system in order to identify and 
correct numerous discrepancies found in the system's data (e.g., 
duplicate debt entries, inconsistencies between debt amounts in the 
referral system and debt amounts in the tracking system) and to place 
additional edits in the system to prevent such errors in the future. 
CMS did not resume referring nonMSP debts to PSC through the debt-
referral system until June 2001. 

Not only did CMS's suspension of the debt-referral system limit the 
debt-referral activities of the 5 contractors participating in the non-
MSP pilot, it also delayed CMS's planned October 2000 expansion of the 
debt-referral program to all contractors. CMS did not issue updated 
instructions for referring non-MSP debts to each of its 55 contractors 
until April 2001. The guidance, revised in response to our September 
2000 recommendation that all CMS debt be transferred to PSC as soon as 
it becomes delinquent and is eligible for transfer, expanded the 
criteria for referring non-MSP debts by including Part B debts, as 
well as Part A debts, and lowering the referral threshold from $600 to 
$25.[Footnote 12] 

After the debt-referral system began operating again and the referral 
requirements were expanded and extended to all contractors, CMS 
increased its referrals of non-MSP debts to PSC by about $1.9 billion 
from June through September 2001. 

Limited Contractor Efforts and Inadequate Monitoring of Contractor 
Performance Impeded Referral of MSP Debts: 

The low referral of MSP debts in fiscal year 2001 occurred partly 
because for most of the year, until May 2001, only the 15 contractors 
participating in the pilot project were authorized to identify 
eligible Part A debts and refer them to PSC. According to information 
from CMS, as of September 30, 2000, these 15 contractors held a total 
of about $542 million of Part A debts that were more than 180 days 
delinquent, representing about 31 percent of MSP debts eligible for 
referral as of that date. 

In response to our September 2000 recommendation, CMS issued a program 
memorandum in May 2001 extending to all MSP contractors the 
requirement to identify delinquent MSP debts and refer them to PSC. 
CMS also expanded the referral criteria to include Part B debts, as 
well as Part A debts. The dollar threshold for referral is to be 
reduced in phases, from $5,000 to $25.[Footnote 13] The phased 
reduction is intended both to eliminate the backlog of higher-dollar 
debts and to ensure referral of current debts, thereby avoiding a 
continuing backlog. A CMS official stated that the memorandum was not 
issued sooner partly because CMS had to respond to contractors' 
concerns that they needed additional funding to automate their debt-
referral processes to comply with the new referral requirements. The 
CMS official stated that after much consideration, CMS concluded that 
referrals could be performed manually and that seeking additional 
funding for automation would likely cause further delays in referring 
MSP debts to PSC. 

Another factor that contributed to the low amount of MSP debt referred 
to PSC was the failure of certain pilot project contractors to 
promptly refer eligible debts. Under the MSP pilot project, 
contractors were required to identify eligible Part A debts, send DCIA 
intent letters (which state CMS's intention to refer a debt for 
collection action if it is not paid within 60 days) to those debtors, 
and enter the debt information into the debt-referral system. We 
selected and reviewed the work of 3 large Medicare contractors that 
participated in the MSP pilot project and found that none of the 3 
promptly identified and referred all eligible MSP debts. 

One of the contractors held $255 million of Part A MSP debt more than 
180 days delinquent as of September 30, 2000. As of May 2001, the 
contractor reported that it had identified and sent out DCIA intent 
letters for only about $33 million, or about 13 percent, of the debt. 
The contractor official responsible for MSP debts stated that the 
contractor was under the impression that the pilot project required it 
to make only two file queries, in February 2000, to identify eligible 
debts and that the queries were to cover only debts incurred from 
March 1997 through August 1998. However, our review of the 
implementing instructions for the pilot project found that it was to 
cover all MSP debts that were not more than 6 years old, and CMS 
officials responsible for MSP debts advised us that they had never 
instructed the contractor to limit its file queries. 

Another of the 3 contractors whose work we reviewed held about $61 
million of Part A MSP debt delinquent more than 180 days as of 
September 30, 2000. The contractor official responsible for MSP debts 
stated that the contractor believed that the MSP pilot project had 
ended in August 2000. As such, from September 2000 through December 
2000, the contractor did not review its debt portfolio to identify 
additional MSP debts eligible for referral. The contractor 
subsequently began identifying and referring debts again in January 
2001. In addition, the contractor's records indicated that as of April 
2001, about $6.2 million, or 48 percent, of the $12.8 million of debt 
for which it had sent DCIA intent letters prior to September 2000 had 
not been referred to PSC. These debts remained at the contractor even 
though they were well beyond the 60-day time frame CMS specified for 
referring debts to PSC after a DCIA intent letter is sent. The 
responsible contractor official was unable to explain why the debts 
had not been referred for collection action. 

Before our review, CMS had not developed or implemented policies and 
procedures for monitoring contractors' referral of MSP debts. As a 
result, CMS did not monitor the extent to which contractors referred 
specific MSP debts to PSC and did not identify specific contractors, 
such as those mentioned above, that failed to identify and refer all 
eligible debts. Without such monitoring, CMS could not take prompt 
corrective action. This lack of procedures for monitoring contractors 
and the resulting lack of monitoring are inconsistent with the 
comptroller general's Standards for Internal Control in the Federal 
Government. The standards state that internal controls should be 
designed to assure that ongoing monitoring occurs in the course of 
normal operations and that it should be performed continually and 
ingrained in agency operations.[Footnote 14] 

In response to our work, CMS officials stated that in June 2001 they 
had begun to review selected contractors' MSP debt referrals. A CMS 
official said that the 10 CMS regional offices would assume a more 
active role in ensuring that contractors promptly refer eligible MSP 
debts to PSC. As of September 2001, CMS had not developed formal 
written procedures for monitoring contractors, but agency officials 
stated that they planned to develop such procedures. 

CMS Policy to Close Out Older MSP Debts Also Limited Referrals of MSP 
Debts: 

Many MSP debts will never be referred to PSC because of a CMS decision 
to close out older MSP debts. In February 2001, CMS issued guidance to 
its contractors directing them to methodically terminate collection 
action on or close out MSP debts delinquent more than 6 years and 3 
months.[Footnote 15] CMS officials stated that the agency selected 
this delinquency criterion because the statute of limitations prevents 
the Department of Justice from litigating to collect debts more than 6 
years after they become delinquent. Also, these debts, because they 
are closed out, will never be reported to FMS for TOP, which has been 
FMS's most effective debt collection tool.[Footnote 16] For fiscal 
year 2000, Treasury found that the collection rate for the small 
amount of MSP debt that had been reported to TOP was about 10.5 
percent, which is higher than TOP's average collection rate. The 
February 2001 guidance was a continuation of CMS policy set forth in 
the agency's instructions to contractors at the start of the MSP pilot 
project in fiscal year 2000, which authorized contractors to identify 
and refer only debts up to 6 years old. 

A CMS official stated that older MSP debts were closed out because it 
was not cost-effective to collect them. However, CMS could not provide 
any documentation to support the assertion that it is not cost-
effective to attempt to collect older MSP debts, and CMS did not test 
this assumption in its MSP pilot project. 

Age alone is not an appropriate criterion for terminating collection 
action on a debt. The agency should pursue all appropriate means of 
collection on a debt and determine, based on the results of the 
collection activity, whether the debt is uncollectible. According to 
discussions with contractor officials, collection activity prior to 
the termination of the debts likely involved only the issuance of 
demand letters, as required by CMS's Budget and Performance 
Requirements for contractors. 

The CMS official said she was not aware of any assessment performed to 
determine the total dollar amount of debts that will be designated as 
eligible for close-out because of this age threshold. During our 
review, CMS had already approved close-out of about $86 million of MSP 
debts at the contractors we visited. About $85 million of these debts 
were less than 10 years old and therefore could have been referred to 
PSC for collection action, including reporting to TOP.[Footnote 17] 

In a related matter, CMS has not established a process, including 
providing authorization to PSC, to report closed-out MSP debts to IRS. 
The Federal Claims Collection Standards and Office of Management and 
Budget (OMB) Circular No. A-129 require that agencies, in most cases, 
report closed-out debt amounts to IRS as income to the debtor, since 
those amounts represent forgiven debt, which is considered income and 
therefore may be taxable at the debtor's current tax rate. Thus, 
reporting the discharge of indebtedness to IRS may benefit the federal 
government, through increased income tax collections. CMS stated that 
agency officials and the CMS Office of General Counsel are discussing 
the reporting of closed-out MSP debts to IRS but did not specify when 
actions, if any, would be taken to report such debts to IRS. 

CMS Faces Challenges in Effectively Managing Future Medicare Debt 
Referrals: 

Even with CMS's non-MSP debt-referral system operating again and its 
MSP and non-MSP referral requirements extended to all of its 
contractors, the agency still faces obstacles to effectively managing 
its Medicare debt referrals. As mentioned earlier, in fiscal year 2001 
CMS expanded debt-referral requirements from the pilot projects to 
include all 55 Medicare contractors. CMS lacks complete and accurate 
debt information, however, and this shortcoming will likely hamper the 
agency's ability to adequately monitor contractors' debt referrals. In 
addition, CMS's referral instructions to contractors currently do not 
cover some types of Medicare debts, including MSP liability debts. 
Without a comprehensive plan in place that covers all types of 
Medicare debts, CMS faces significant challenges to be able to achieve 
its goal of referring all eligible Medicare debts by the end of fiscal 
year 2002. 

Lack of Complete and Accurate Debt Information Hampers CMS's Ability 
to Monitor Debt Referrals: 

All Medicare contractors are now responsible for identifying eligible 
debts from their debt portfolio, sending out DCIA intent letters to 
debtors, and referring eligible debts to PSC. To help ensure that all 
eligible Medicare debts are promptly identified and referred for 
collection, CMS must monitor contractors' debt-referral practices. To 
monitor effectively, the agency needs comprehensive, reliable debt 
information from its contractors, but CMS systems currently do not 
contain complete and accurate information on all CMS Medicare debts. 

CMS Lacks a Centralized Database for MSP Debts: 

One of CMS's most daunting financial management challenges continues 
to be the lack of a financial management system that fully integrates 
CMS's accounting systems with those of its Medicare contractors. 
Because CMS does not have a fully integrated accounting system, each 
MSP debt is maintained only in the internal system of the specific 
contractor that holds the debt. CMS has no centralized database that 
includes all MSP debts held by contractors. As a result, the agency 
cannot effectively monitor the extent to which its various contractors 
are promptly identifying eligible MSP debts and referring them to PSC 
for collection. CMS is developing a system that is to include a 
database containing all MSP debts. However, the agency plans to phase 
the system in, and it is not scheduled to be fully implemented at all 
contractors until the end of fiscal year 2006. 

CMS's Non-MSP Debt-Tracking Systems Contain Inaccurate Information: 

CMS has two debt-tracking systems for its non-MSP debts, one for Part 
A debts and one for Part B debts. Medicare contractors are responsible 
for entering non-MSP debts into the systems and updating the debts' 
status (with respect to bankruptcy, appeals, etc.) as appropriate. 
According to CMS officials, the agency intends to use these systems to 
monitor contractors to ensure that they are promptly identifying and 
referring eligible debts to PSC. 

Accurate tracking information is critical for monitoring debt-referral 
practices. CMS found, however, that its non-MSP debt-tracking systems 
contain inaccurate information because a significant number of 
contractors have not been adequately updating information in the 
systems. CMS performed contractor performance evaluations for fiscal 
year 2000 on 25 contractors and found that 19 were not adequately 
updating information in the non-MSP debt-tracking systems. For 5 of 
the 19 contractors, CMS considered the problems to be significant 
enough to require the contractors to develop written performance 
improvement plans. 

Our work at the 2 selected contractors involved in the non-MSP pilot 
project corroborated CMS's own findings. CMS periodically sent non-MSP 
pilot contractors a list of eligible Part A debts from the agency's 
debt-tracking system for possible referral to PSC. For the 2 non-MSP 
contractors we reviewed, CMS selected $1.3 billion of debts from the 
Part A non-MSP debt-tracking system. The contractors determined that 
$289 million of the debts, or about 23 percent, were actually 
ineligible for referral because they were in bankruptcy, under appeal, 
or under investigation for fraud. In addition, we identified $21 
million of debts that 1 of the 2 non-MSP pilot contractors had 
misclassified on the CMS debt-tracking system as bankruptcy debt and 
ineligible for referral. These debts had actually been dismissed from 
the bankruptcy proceedings and therefore should have been reported in 
the debt-tracking system as eligible for referral. In this case, the 
contractor had not updated its own internal system for $8 million of 
the debts and was therefore not pursuing postdismissal collection 
actions on them. For the remaining $13 million, the contractor had 
updated its internal system and was pursuing collection but had failed 
to properly update the CMS debt-tracking system. 

CMS's Non-MSP Debt-Tracking Systems Do Not Enable the Agency to 
Monitor Promptness of Debt Referral: 

To effectively monitor contractor performance, CMS must have the 
ability to determine whether contractors are referring debts promptly. 
However, CMS's non-MSP debt-tracking systems lack the capacity to 
indicate whether contractors are promptly entering non-MSP debts into 
the debt-referral system after they mail DCIA intent letters because 
the systems do not track the date of status code changes (e.g., the 
date when the DCIA letter was issued). We found that CMS's non-MSP 
debt-tracking system for Part A debts did not identify $5.2 million of 
debts that had been pending referral for at least 9 months at one of 
the two non-MSP contractors that we reviewed. In response to our work, 
CMS officials stated that they are in the process of modifying the non-
MSP debt-tracking systems to allow the agency to monitor how promptly 
contractors are referring debts in the future. 

CMS Lacks a Comprehensive Referral Plan That Covers All Types of 
Eligible Debt: 

CMS has not developed a comprehensive plan that covers all types of 
Medicare debt eligible for referral. The agency lacks information on 
the total dollar amount of eligible debts not covered by its current 
referral instructions to the Medicare contractors, and it has not 
developed a detailed plan or specific time frame for referring these 
debts. Without a comprehensive plan in place, CMS faces significant 
challenges to be able to achieve its goal of referring 100 percent of 
eligible debts in fiscal year 2002. 

Types of debt for which CMS has not yet established a referral plan 
include, but are not limited to, the following: 

* MSP liability. MSP liability debts arise when Medicare covers 
expenses related to accidents, malpractice, workers' compensation, or 
other items not associated with group health plans that are 
subsequently determined to be the responsibility of another payer. 

* Part A claims adjustments. Part A claims receivables are created 
when previously paid claims are adjusted. Reasons for claims 
adjustments include duplicate processing of charges or claims, payment 
for items or services not covered by Medicare, and incorrect billing. 
The CMS debt-tracking system does not track these debts. Debts 
resulting from claims adjustments are generally offset from subsequent 
Medicare payments and require no further collection action. Should 
subsequent Medicare payments be unavailable for offset, however, no 
requirements exist for Medicare contractors to perform any other 
collection actions, such as issuing a demand letter. 

We found that as of September 30, 2000, the four contractors we 
reviewed held about $9.6 million of MSP liability debts and about 
$10.7 million of debts related to Part A claims adjustments. CMS 
officials stated that the agency intends to refer both types of debt 
to PSC in the future. 

CMS Does Not Provide Reliable Medicare Debt Information to Treasury: 

The amounts of eligible debt CMS reported in the September 30, 2000, 
Medicare Mist Fund TROR were not reliable. CMS did not properly report 
the delinquency aging for certain debts, including debts previously 
transferred to regional offices for collection. CMS also did not 
properly report its exclusions from referral requirements. For 
example, the agency inappropriately reported as excluded $149 million 
of non-MSP debts that had been referred to CMS regional offices for 
collection.[Footnote 18] In addition, CMS did not report any exclusion 
amounts for MSP debts, even though we noted that certain MSP debts 
were involved in litigation, or for non-MSP debts under investigation 
for fraud. Finally, because of a data-entry error, CMS inadvertently 
overstated debt referrals by $67 million. 

It is imperative that CMS provide Treasury with reliable information 
on eligible Medicare debt. Treasury uses the information to monitor 
agencies' implementation of DCIA. In addition, the TROR is Treasury's 
only comprehensive means of periodically collecting data on the status 
and condition of the federal government's nontax debt portfolio, as 
required by the Debt Collection Act of 1982 and DCIA. CMS's delinquent 
Medicare debts represent a significant portion of delinquent debts 
governmentwide. Therefore, they must be reported accurately if 
governmentwide debt information is to be useful to the president, the 
Congress, and OMB in determining the direction of federal debt 
management and credit policy. 

According to CMS officials, the agency is revising its method for 
determining eligible debt amounts. For example, CMS officials stated 
that the agency no longer reports debts referred to regional offices 
as exclusions and is in the process of identifying and reporting 
exclusion amounts for MSP debts. 

Conclusions: 

Although CMS made progress in referring eligible Medicare debts to PSC 
in fiscal year 2001 and met its referral goal for the year, a 
substantial portion of Medicare debts—particularly MSP debts—are still 
not being promptly referred for collection action. Inadequate 
contractor monitoring, resulting partly from CMS's debt system 
limitations, has contributed to the slow pace of MSP debt referrals. 
In addition, CMS has not begun referring certain types of eligible 
Medicare debts, such as MSP liability debts, and those debts will 
continue to age until CMS completes and implements a comprehensive 
referral plan. Since recovery rates decrease dramatically as debts 
age, CMS cannot accomplish DCINs purpose of maximizing collection of 
federal nontax debt unless it refers eligible debts promptly. 

CMS's policy of closing out eligible MSP debts solely on the basis of 
their age, without performing a quantitative study to determine 
whether collection action would be cost-effective, has also reduced 
referrals and eliminated opportunities for potential collections on 
those debts. In addition, by not reporting closed-out debts to IRS, 
the federal government may be missing an opportunity to increase 
government receipts. 

Medicare debts are a significant share of delinquent debt 
governmentwide, and CMS's inaccurate reporting to Treasury on 
exclusion amounts, debt aging, and referrals may distort 
governmentwide debt information used to determine the direction of 
federal debt management and credit policy. CMS's inaccurate reporting 
of eligible debt amounts also impedes Treasury's ability to monitor 
the agency's compliance with DCIA. 

Recommendations for Executive Action: 

To help ensure that CMS promptly refers all eligible delinquent 
Medicare debts to PSC, as we recommended in September 2000, and that 
all benefits from closed-out debts are realized, we recommend that the 
administrator of CMS: 

* establish and implement policies and procedures to monitor 
contractors' implementation of CMS's May 2001 instructions to ensure 
the prompt referral of eligible MSP debts; 

* implement changes to CMS's non-MSP debt tracking systems so that CMS 
personnel will be better able to monitor contractors' referral of 
eligible non-MSP debts as required by CMS's April 2001 instructions to 
contractors; 

* develop and implement a comprehensive referral plan for all eligible 
delinquent Medicare debts that includes time frames for promptly 
referring all types of debts, including MSP liability and Part A 
claims adjustments debts; 

* perform an assessment of MSP debts being closed out because they are 
more than 6 years and 3 months delinquent to determine whether to 
pursue collection action on the debts, and document the results of the 
assessment; 

* establish and implement policies and procedures for reporting closed-
out Medicare debts, when appropriate, to IRS; and; 

* validate the accuracy of debt-eligible amounts reported in the 
Medicare Trust Fund TROR by establishing a process that ensures, among 
other things, (1) accurate reporting of the aging of certain 
delinquent debts, (2) accurate and complete reporting of debts 
excluded from referral requirements, and (3) verification of data 
entry for referral amounts. 

Agency Comments and Our Evaluation: 

In written comments on a draft of this report, CMS agreed with five of 
our six recommendations and summarized actions taken or planned to 
address those five. CMS expressed confidence that it would attain its 
goal of referring all eligible debt to Treasury by year-end as part of 
its overall financial plan. 

Regarding our recommendation to assess closed-out MSP debts that were 
more than 6 years and 3 months delinquent to determine whether to 
pursue collection action on them, CMS stated that further collection 
efforts would not be cost-effective. According to CMS, medical 
services at issue in these MSP debts are typically from the early 
1990s and often involve Medicare services from the mid- to late 1980s. 
CMS indicated that the costs of validating the debts and the costs and 
fees associated with DCIA cross-servicing and TOP were too great to 
justify additional collection efforts. However, as we stated in the 
report, CMS could not provide any documentation to support its 
position that it is not cost-effective to attempt to collect older MSP 
debts, and CMS did not test this assumption in its MSP pilot project. 

CMS's efforts to collect this debt prior to close-out were not 
adequate. The Federal Claims Collection Standards require that before 
terminating collection activity, agencies are to pursue all 
appropriate means of collection and determine, based on the results of 
the collection activity, that the debt is uncollectible. According to 
discussions with Medicare contractor officials, the collection 
activity for many of these MSP debts was limited to issuance of demand 
letters, which does not satisfy the requirement that all appropriate 
means of collection action be pursued on debts. In addition, most of 
the closed-out MSP debts at the Medicare contractors we visited were 
less than 10 years delinquent and therefore could have been referred 
to PSC for collection action, including reporting to TOP. As such, we 
continue to believe that CMS should assess MSP debt to determine 
whether additional collection activity is appropriate in light of the 
minimal prior collection activity. 

As agreed with your office, unless you announce its contents earlier, 
we plan no further distribution of this report until 30 days after its 
issuance date. At that time, we will send copies to the chairmen and 
ranking minority members of the Senate Committee on Governmental 
Affairs and the House Committee on Government Reform and to the 
ranking minority member of your subcommittee. We will also provide 
copies to the secretary of health and human services, the inspector 
general of health and human services, the administrator of the Centers 
for Medicare & Medicaid Services, and the secretary of the treasury. 
We will then make copies available to others upon request. 

If you have any questions about this report, please contact me at 
(202) 512- 3406 or Kenneth Rupar, assistant director, at (214) 777-
5600. Additional key contributors to this assignment were Matthew 
Valenta and Tanisha Stewart. 

Sincerely yours, 

Signed by: 

Gary T. Engel: 
Director: 
Financial Management and Assurance: 

[End of section] 

Appendix I: Comments from the Centers for Medicare & Medicaid Services: 

Department Of Health & Human Services: 
Centers for Medicare & Medicaid Services: 
Administrator: 
Washington, DC 20201: 

Date: January 30, 2002: 

To: Gary T. Engel, Director: 
Financial Management and Assurance: 
General Accounting Office: 

From: [Signed by] Thomas A. Scully: 
Administrator: 
Centers for Medicare & Medicaid Services: 

Subject: General Accounting Office (GAO) Draft Report, Debt Collection 
Improvement Act of 1996: HHS' Centers for Medicare & Medicaid Services 
Faces Challenges to Fully Implement Certain Key Provisions (GAO-02-
307): 

Thank you for the report on our progress in implementing the major 
provisions of the Debt Collection Improvement Act (DCIA) of 1996. We 
are continually striving not only to improve our debt management 
policies and recover monies owed to us but also to ensure that 
taxpayer monies are only spent for their intended purpose. 

We are extremely proud of our work in referring delinquent debt to the 
Department of the Treasury (Treasury). Early on, we developed an 
aggressive plan to implement the DCIA and have faithfully followed it 
with great success, having referred more than $4 billion in delinquent 
debt that is more than 180 days old during the past 2 years. In order 
to accomplish this task, we hired additional staff, developed new 
procedures, and held extensive nationwide training sessions for both 
the Centers for Medicare & Medicaid Services' (CMS)'s staff and more 
than 50 Medicare contractors. Accomplishments have not come easily as 
debts needed to be validated, procedures implemented, and systems 
tested in order to integrate and reconcile our debt with the even 
larger Department of Health and Human Services' (HHS)'s debt portfolio. 

We created a centralized debt referral system enabling all of our 
contractors to access one centralized database. This system was then 
linked with HHS' Program Support Center to ensure an orderly flow of 
delinquent debt for cross servicing and offset. While referrals began 
slowly through a number of pilot programs, it was a necessary process 
which allowed us to identify and to work through and resolve issues 
that inevitably arise in any new Government-wide program before 
expanding it on a nationwide basis. Our training program continues on 
an ongoing basis with monthly teleconferences, annual conferences, and 
the identification and adoption of best practices. We are confident 
that we will attain our goal of having all eligible debt referred to 
Treasury by the end of this year as part of our overall financial 
management plan. 

We appreciate your staff's work and recommendations to improve our 
referral process in a very complex and complicated debt management 
arena. We agree with five of the six recommendations in the report and 
have already started work on their implementation. However, we do not 
believe that referring Medicare Secondary Payer (MSP) debts that are 
over 6 years old will result in any significant amount of recoveries. 

We also agree with your assessment that CMS's challenge continues to 
be the lack of a financial management system that fully integrates 
CMS's accounting systems with those of the Medicare contractors. This 
makes the debt referral process resource intensive. As you are aware, 
we are committed to also meet this challenge and are in the process of 
developing an integrated accounting system under our Healthcare 
Integrated General Ledger Accounting System project. Our first pilots 
are scheduled for early next year. 

We will continue to work with GAO and Congress to refer all eligible 
debt and increase our efforts to prevent debt from occurring in our 
programs. 

Attachments: 

Appendix I: 

GAO Recommendation: 

To help ensure that CMS promptly refers all eligible delinquent 
Medicare debts to program safeguard contractor (PSC), as we 
recommended in September 2000, and that all benefits from closed-out 
debts are realized, we recommend that the Administrator of CMS: 

Establish and implement policies and procedures to monitor 
contractors' implementation of CMS' May 2001 instructions to ensure 
the prompt referral of eligible MSP debts. 

CMS Response: 

The CMS agrees with this recommendation and plans to issue a letter to 
our regional offices by the end of January providing them with 
guidance related to the ongoing monitoring of contractor MSP debt 
referral activities. In addition the contractor performance evaluation 
protocol for MSP has been revised to include the review of MSP debt 
referral activities. 

GAO Recommendation: 

Implement changes to CMS's non-MSP debt tracking systems so that CMS 
personnel will be better able to monitor contractors' referral of 
eligible non-MSP debts as required by CMS's April 2001 instructions to 
contractors. 

CMS Response: 

The CMS agrees with this recommendation. The CMS has identified system 
enhancements required to better monitor contractors' progress in 
referring eligible nonMSP debts. The request for these system changes 
has been forwarded to the appropriate CMS programming staff. 

GAO Recommendation: 

Develop and implement a comprehensive referral plan for all eligible 
delinquent Medicare debts that includes timeframes for promptly 
referring all types of debts, including MSP liability and Part A claim 
adjustments debts. 

CMS Response: 

The CMS agrees with this recommendation and is currently finalizing 
its comprehensive debt referral plan. This plan includes activities 
and timeframes for the referral of all eligible delinquent Medicare 
debt. The CMS has in place a financial management plan outlining the 
complete referral of eligible delinquent debt by the end of fiscal 
year 2002. The CMS has consistently met the goals established in this 
plan. 

GAO Recommendation: 

Perform an assessment of all MSP debts being closed out because they 
are more than 6 years and 3 months delinquent to determine whether to 
pursue collection action on the debts, and document the results of the 
assessment. 

CMS Response: 

The CMS disagrees with this recommendation. Once CMS is current on its 
DCIA referral activities, debts will routinely have been referred to 
the PSC under the CMS MSP DCIA referral process before they qualify 
for "write-off--closed." The medical services at issue in the MSP 
debts which currently qualify for "write-off closed" are routinely 
from the early 1990s and often involve Medicare services from the mid-
to late 1980s. Further collection efforts on these debts is not cost 
effective due to the cumulative effect of the following factors: the 
average percentage of valid documented defenses in response to 
demands, the costs involved in contractor review and validation of 
these debts (particularly if the debtor disputes the debt), and the 
fees/costs associated with DCIA cross servicing and Treasury offset 
program. 

GAO Recommendation: 

Establish and implement policies and procedures for reporting closed-
out Medicare debts, when appropriate, to IRS. 

CMS Response: 

The CMS agrees with this recommendation. We have met with staff from 
the Office of General Counsel and are in the process of determining 
appropriate actions to take on reporting closed out Medicare debt to 
the Internal Revenue Service (IRS) under revised Federal Claims 
Collection Standards, revised OMB Circular A-129, and IRS regulations. 

GAO Recommendation: 

Validate the accuracy of debt-eligible amounts reported on the 
Medicare Trust Fund Treasury Report on Receivables Due From the Public 
by establishing a process that ensures, among other things, (1) 
accurate reporting of the aging of certain delinquent debts, (2) 
accurate and complete reporting of debts excluded from referral 
requirements, and (3) verification of data entry for referral amounts. 

CMS Response: 

The CMS agrees with this recommendation. We have modified our current 
process to further ensure the accurate reporting of the aging of 
delinquent debts and the accurate reporting of debts excluded from 
referral. In addition, we plan to establish a process for the 
verification of referral amounts. 

[End of section] 
 
Footnotes: 
  
[1] U.S. General Accounting Office, Debt Collection Improvement Act of 
1996: Agencies Face Challenges Implementing Certain Key Provisions, 
[hyperlink, http://www.gao.gov/products/GAO-02-61T] (Washington, D.C.: 
Oct. 10, 2001). 

[2] CMS was formerly the Health Care Financing Administration (HCFA). 
HCFA was renamed on June 14, 2001. 

[3] We are also issuing separate reports on certain federal agencies' 
implementation of administrative wage garnishment, the Rural Housing 
Service's implementation of key provisions of DCIA, the Farm Service 
Agency's implementation of key provisions of DCIA, and certain federal 
agencies' delinquent debt reporting practices. 

[4] U.S. General Accounting Office, Medicare: HCFA Could Do More to 
Identify and Collect Overpayments, [hyperlink, 
http://www.gao.gov/products/GAO/HEHS/AIMD-00-304] (Washington, D.C.: 
Sept. 7, 2000). 

[5] DCIA and Treasury regulations exclude certain debts from referral 
for collection action, including debts under appeal or at the 
Department of Justice for litigation, and debtors in bankruptcy. 

[6] U.S. Department of Health and Human Services, Health Care 
Financing Administration, HCFA Financial Report for Fiscal Year 2000 
(Baltimore, Md.: 2001). 

[7] [hyperlink, http://www.gao.gov/products/GAO/HEHS/AIMD-00-304]. 

[8] In the report, CMS stated that it planned to reduce the non-MSP 
referral threshold to $600. In December 2000, CMS instructed Medicare 
contractors to identify and send intent letters for non-MSP debts 
greater than $600. 

[9] Before the pilot projects were initiated, the referral process was 
as follows: (1) contractors referred delinquent debts to the 
appropriate CMS regional office for review to verify that appropriate 
collection actions had been taken; (2) if regional office staff found 
that appropriate actions had been taken, the contractor transferred 
the receivable to CMS, which assumed accountability for collection 
through its regional offices; and (3) CMS, through its regional 
offices or headquarters, was responsible for referring the debts to 
PSC. 

[10] Unfiled cost reports are not recognized as receivables because 
the failure to file a cost report does not complete the earnings 
process; thus, no accounting event occurred from which a receivable 
can be established. Also, without a cost report, CMS cannot reasonably 
estimate the amount of the receivable, as required by federal 
accounting standards. 

[11] As of the end of fiscal year 2001, PSC reported collecting about 
$3.8 million during fiscal year 2001 of the approximately $83 million 
of MSP debts referred. For non-MSP debts, PSC reported that it and 
Treasury had collected about $4.1 million during fiscal year 2001 of 
the approximately $3.7 billion of non-MSP debts referred. 

[12] As we reported in September 2000, CMS planned to reduce the non-
MSP referral threshold from $100,000 to $600. In December 2000, CMS 
instructed Medicare contractors to identify and send intent letters 
for non-MSP debts greater than $600. In April 2001, CMS reduced the 
threshold to $25 and instructed Medicare contractors to begin 
referring all eligible non-MSP debts that are $25 or greater. 

[13] To address the existing backlog of delinquent debt, CMS 
established a workload standard for MSP contractors. The standard 
specifies that each contractor is to issue 200 "intent to refer" 
letters or to resolve 500 selected debts each month, as long as the 
contractor has sufficient delinquent debts to meet this requirement. 
If a contractor has insufficient debts greater than $5,000 to meet the 
workload standard, the contractor then selects debts greater than 
$250. If the contractor has insufficient debts greater than $250 to 
meet the workload standard, the contractor then selects debts greater 
than $25. 

[14] U.S. General Accounting Office, Standards for Internal Control in 
the Federal Government, [hyperlink, 
http://www.gao.gov/products/GAO/AIMD-00-21.3.1] (Washington, D.C.: 
Nov. 1999). 

[15] Certain categories of debts were excluded from close-out, 
including debts in litigation, in bankruptcy, and under investigation 
for fraud. 

[16] According to documents provided by Treasury, during each of the 
last 3 calendar years FMS has collected more than $1 billion of 
federal nontax debt through TOP by offsetting tax refund payments. 
This amount far exceeds the amount collected through any other FMS 
debt collection tool. 

[17] For most types of debt, DCIA provides that administrative offset 
is available for claims that have not been outstanding for more than 
10 years. TOP is available to collect nontax debts referred within 10 
years after the agency's right of action accrued. 

[18] Before implementation of the DCIA referral process, contractors 
were required to transfer receivables to CMS regional offices for 
collection. 

[End of section] 

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