Hospitals' Use of Contract Management Services

GAO recently completed a review of hospitals' use of contract management services. It examined those arrangements where the management firm provides full service management and assumes responsibility for management of the day-to-day operation of the hospital. The cost of these contracts can be significant and hospitals' use of them is increasing at a rapid rate. These contracts frequently covered excessively long periods. The fees for many of the contracts were often based on a percentage of gross revenues and varied widely. Documentation of the services actually provided was inadequate. Adequacy of controls over payments to the firms was questionable. Medicare intermediaries generally were not reviewing the reasonableness of the fees charged. The Health Care Financing Administration (HCFA) had not developed adequate standards and instructions governing the reimbursement for the costs of the contracts. GAO visited Medicare intermediaries, HCFA headquarters, and the Blue Cross Association. It also reviewed the provisions of 66 contracts and did audit work at hospitals which were operated under management contracts. The contracts reviewed had many common characteristics. Although the management firm was responsible for management of the day-to-day operation of the hospital, the contracts contained specific provisions limiting the extent of the management firm's authority, with the hospital's board of directors retaining the ultimate control. Another major feature of the contracts was that they provided the hospital with a wide variety of administrative and health expertise. Hospitals that retain management firms generally have been characterized as being in serious financial trouble. Problems that the hospitals have and which the firms attempt to address included underutilization, overstaffing, excessive inventories, and untimely collection of receivables. The contracts which GAO reviewed did not contain any provision which provided any specific control over payments to the management firms.