Summary: 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.
The reasonableness of the fees for management contracts should receive much greater attention by HCFA and its intermediaries. The magnitude and recurring nature of the fees coupled with the inadequacy of the documentation of services provided leaves too many unanswered questions. Most of the tasks enumerated in the contracts are ones that would be performed or supervised by a hospital administrator and/or controller in the normal pursuit of their duties. The question arises about what services the hospital is receiving in return for the fees paid above and beyond a reasonable salary/fringe benefit package for the administrator and comptroller. The HCFA proposal to relate reasonableness of fees to time spent could lead to program abuse if action is not taken to ensure adequate independent checks over the use of consultation services. The decision to use a management firm's specialists rests with the hospital administrator and/or controller who are often firm employees. This arrangement is vulnerable to abuse and could serve as a vehicle for generating more revenue for the management firm. The management firms should be held strictly accountable for the use of the firm's specialists and keep the hospital board informed of the firm's performance. The hospital board should be required to countersign or control all checks made payable to the management firm. Management contract fees calculated through use of percentage formulas inherently raise a question of reasonableness.
