Under Pressure

n Nancy-Ann Min DeParle's first day at the Health Care Financing Administration, it was only a matter of hours before she realized the magnitude of the task ahead of her.

The head of HCFA always faces a daunting challenge: overseeing the largest health care budget in the world by administering Medicare and Medicaid, which together account for a third of all health expenditures in the United States. With an annual budget of more than $360 billion, HCFA's programs provide care to 75 million Americans, and the agency's 4,000 employees process 900 million Medicare and Medicaid claims a year.

But in July 1997, when DeParle attended her first executive leadership meeting as designated successor to outgoing HCFA Administrator Bruce Vladeck, it became clear that even a typically hectic year at the agency would pale in comparison to the coming one.

The most sweeping reorganization in the agency's 20-year history went into effect on the day of DeParle's first leadership meeting. On paper, HCFA's stovepipe structure vanished that day and was replaced by a horizontal system focused on the agency's three customer groups: beneficiaries, states, and health plans and providers. In reality, executives, managers and employees were still bumping into stovepipes as they began to feel out where they fit in the reorganization.

At the leadership meeting, executives were briefed on proposed changes to Medicare and Medicaid laid out in the Balanced Budget Act of 1997, which was working its way through congressional committees at the time. DeParle had represented the Clinton administration in consultations on the act, but until the meeting she hadn't thought much about how hard implementing the legislation might be. DeParle looked over a handout describing the proposed changes, which included billions of dollars in savings produced by changes to Medicare payment systems and dozens of provisions adding new responsibilities to HCFA's workload. The handout listed each provision of the bill and its implementation date.

DeParle was struck by the size and scope of what she was being asked to undertake. Suddenly she felt very hot. She glanced up at a cool and calm Vladeck, who would be leaving HCFA in September. DeParle breathed a sigh of relief. If Vladeck was so cool in the face of the reorganization and the numerous changes Congress was considering for HCFA, it must mean he was confident the agency could handle all these challenges, DeParle concluded.

After the meeting, DeParle approached Vladeck. She told him of her anxiety about what a huge undertaking they faced, but said she was relieved because he seemed so calm.

Vladeck smiled at DeParle.

"Nancy-Ann, you just don't get it," Vladeck said. "I'm out of here."

Forces Converge

President Clinton signed the Balanced Budget Act (BBA) into law on Aug. 5, 1997. The act calls for $116 billion in savings from Medicare and $14.6 billion from Medicaid over five years. Much of the savings were to come from changes to the payment systems HCFA runs for hospitals, nursing homes, physicians' services, medical equipment and home health services. The savings were expected to extend the life of the Medicare trust fund from 2001 to 2008.

HCFA was also charged with adding a third set of insurance choices to the two-choice Medicare program. Medicare's traditional choices, fee-for-service and managed care, would be supplemented by Medicare+Choice, requiring HCFA to set up structures and rules for preferred provider organizations, plans offered by provider-sponsored organizations, Medicare Medical Savings Accounts and private fee-for-service plans. HCFA was required to launch a massive information campaign in the fall of 1998 describing the new programs to the nation's 39 million Medicare beneficiaries.

The BBA also put HCFA in charge of a new program aimed at uninsured children--the State Children's Health Insurance Program. HCFA would oversee states' efforts to enroll at least 2 million children in the program.

The BBA brought Medicare and Medicaid the most sweeping changes since their inception in 1966. The legislation created 350 distinct new tasks for the agency.

DeParle made implementation of the BBA her top priority. But other forces would compound the difficulties of turning a complex legislative package into public policy. If timing is everything, DeParle didn't have much going for her.

The first problem was the reorganization that Vladeck had initiated. The restructuring left many employees, who had been working within the same organizational boundaries for 20 years, feeling as if they were blindfolded. Because relocating employees to new offices took about a year, managers found themselves overseeing staff scattered in as many as seven places around HCFA's Baltimore headquarters, agency supervisors told the General Accounting Office. The cross-cutting nature of many of the BBA provisions required communication among all HCFA divisions, but employees who had been calling the same people at the same phone numbers for years discovered they couldn't find each other.

On top of the reorganization, other human resources changes added to HCFA's burden. Almost 40 percent of the organization had turned over during the previous five years, GAO found. Buyouts, early outs and retirements carried away employees with specialized expertise. While the turnover brought on employees with needed skills, managers had to spend time teaching them the complexities of Medicare and Medicaid. A National Performance Review initiative also expanded the supervisor-to-employee ratio at HCFA from 1-to-5.5 to 1-to-11, forcing managers to adjust to a wider span of control.

Some health-care analysts aren't sure HCFA's staff has the right skills mix to make the changes envisioned in the Balanced Budget Act work.

"These are people who have worked at writing regulations all their lives," says Carrie Gavora, a health policy analyst for the conservative Heritage Foundation. "Now they're trying to use the same people to change the culture from a bureaucracy to a businesslike culture. I don't think you can do that."

But HCFA's problems involved more than just personnel and culture changes. In July 1997, the Health and Human Services Department inspector general announced that HCFA had made improper payments in fiscal 1996 totaling $23 billion, or 14 percent of Medicare fee-for-service benefit payments. That staggering figure revealed widespread weaknesses in HCFA's and Medicare contractors' documentation and tracking of payments.

HCFA was also forced to pull the plug on its massive computer modernization project, the Medicare Transaction System, last year, after spending $80 million over five years on the upgrade. Projected 10-year costs for the system had mushroomed from $151 million in 1992 to $1 billion in 1997.

Adding to that information technology headache, HCFA had to step up its efforts to eradicate the year 2000 computer bug from its systems.

Finally, under the 1996 Health Insurance Portability and Accountability Act, HCFA took on increased responsibility for fighting fraud and abuse and simplifying a number of administrative processes. For example, the law instructed HCFA to monitor and enforce health plans' compliance with new portability regulations. It had no staff to perform such a function.

In sum, HCFA faced massive changes: 350 new BBA-induced tasks, the most sweeping reorganization in agency history, a new administrator, a substantial loss of institutional memory, financial management and information technology problems, and a burgeoning year 2000 computer crisis.

Observers empathize with DeParle and HCFA's 4,000 employees.

"It's just been hell at the agency. With any reorganization, they would have horrible morale problems anyway. Throw in a whole set of new laws, and it's been tough," says Lynn Etheredge, who was the chief Office of Management and Budget analyst on Medicare and Medicaid issues from 1972 to 1982 and who now works as a HCFA consultant. "HCFA has an enormous management challenge, not just to implement the BBA but also to operate the traditional fee-for-service program. They're paying 800 million, 900 million bills a year. You get a couple days behind on that workload and you're in trouble."

First Things First

Faced with a whirlwind of pressing issues, DeParle set four top-level priorities.

First was executing the hundreds of BBA provisions, many of which had deadlines within a few months of the legislation's enactment. Second was the children's health insurance initiative, which DeParle singled out of the BBA because it, too, had an early deadline and because it was a Clinton administration priority. Third was the fight against fraud and abuse to cut down the improper payments the inspector general had identified, and fourth was preparing HCFA's computer systems for the year 2000.

Once she set her priorities, DeParle had to make sure her executives and employees understood them.

"If you're trying to steer an organization, you have to be very clear about the lines of accountability and what you expect, and you have to repeat it over and over again," DeParle says. At weekly executive leadership meetings, DeParle devoted at least a half-hour to BBA issues, forcing executives who were not directly involved in certain initiatives to be aware of what was going on around the agency. "That's part of my method. It helped to make sure everyone understood it was a top priority."

With the large number of BBA provisions, DeParle had to prioritize within her top priority. The executive leadership team selected as BBA coordinator Dan Waldo, a 20-year HCFA veteran who had worked throughout the agency and understood the organization's structure, personalities and culture. Waldo's job was to create a project management system through which agency staff could determine how to divide up their time among BBA provisions. Agency leaders used the system to track BBA implementation progress.

Waldo started off by meeting with HCFA's legislative staff and creating a spreadsheet of the law's provisions. For each provision, the group identified which HCFA component should implement it, its deadline and a manager who would serve as the main contact.

Managers had to report to Waldo on their progress and coordinate with other offices on cross-cutting provisions. To make sure managers were talking to each other, Waldo's project management team required the managers to use formal sign-off sheets.

Some managers initially resisted the effort. They bemoaned the step-by-step reporting and the sign-off sheets, which had "enough names to take on the appearance of a staff roster," they told GAO. In addition, managers squabbled over who should be responsible for certain provisions.

Organizational politics also posed a difficult challenge. In the HCFA universe, policy people are from Venus and information systems people are from Mars. But tight BBA deadlines required the groups to learn how to speak each other's language. Waldo served as translator, bringing together policy experts, systems administrators and contract managers to figure out how each BBA provision affected each group.

DeParle and Waldo met weekly to discuss the status of BBA implementation. They devised a system for tracking each provision that included three levels: green light (all systems go), yellow light (problems arising) and red light (danger of failure).

What's a Vacation?

With the project management system in place, HCFA got into full BBA swing. In December 1997 alone, HCFA put out 16 regulations, compared to the six regulations of a typical month.

The accelerated work schedule meant vacations were delayed, long hours worked, and many compensatory hours issued.

"I have seen over the past year an incredible effort on the part of this organization," DeParle says. "I have senior managers who not only delayed vacations, but delayed retirement to make sure the job gets done."

The combination of agency challenges hurt morale, says Joe Flynn, vice president of American Federation of Government Employees Local 1923 and HCFA's principal union officer.

"There's mucho work and a lot of frustration," Flynn says. "The reorganization has exacerbated the situation. People have essentially whole new working relationships. Tasks take a lot more coordination."

DeParle's priorities did not always take center stage throughout the organization, Flynn says, because of a communication gap between top and mid-level managers.

"She ended up with some managers who were totally opposed to the reorganization and would have liked to see it fail," Flynn says. "You have resources being pulled off in order to meet BBA requirements, you have a reorganization that requires a lot of coordination across component lines, and a management situation where messages are not coming down."

Flynn also criticized some mid-level managers for failing to prioritize the way DeParle did at the top, tossing dozens of tasks in employees' in-boxes without explaining which were the most important.

"HCFA is full of hard workers," Flynn says. "But you have to tell them what they need to get done."

In a January 1998 report, William Scanlon, GAO's health financing and systems issues director, warned that HCFA needed to balance BBA implementation with its important ongoing programs. GAO surveyed agency managers, who said they were concerned that the quality of non-BBA work would be compromised or neglected. Because Congress did not authorize new staff to handle BBA requirements (or, for that matter, those of the Health Insurance Portability and Accountability Act), current staff had to shoulder extra work.

"I think I'm clear about my priorities, but I'm also clear that I have more than one," DeParle says. "We can't let our other work suffer. And I wouldn't say other things have suffered. It isn't that we haven't done the things we needed to do, but we probably would have taken more care in doing those other things."

BBA implementation hit a few hitches; 25 percent of the BBA's Medicare changes missed their July 1998 deadlines. But despite the internal struggles, HCFA managed to complete 189 BBA provisions by the act's first anniversary.

Fingers in the Pie

The missed deadlines were caused in part because HCFA is burdened by several layers of oversight.

"The HHS structure in which HCFA is located is incredibly time-consuming and difficult to work in," says Vladeck. "The HCFA administrator can't go to the bathroom without four or five people signing off on it." Too many organizations and people--HHS, OMB, the White House domestic policy staff, other White House staffers and the HHS inspector general--think HCFA's business is their business, Vladeck says.

In addition to HCFA's executive branch overseers, Congress pressured the agency. DeParle says she spent nearly a third of her BBA time in committee hearings, meetings with members of Congress and their staffs, and dealings with GAO and other advisory groups, and thinks she should have spent even more. Some observers say HCFA does a poor job of explaining its challenges and defending its budget requests.

"HCFA does a terrible job of justifying the work it does with the resources it gets," says Julie James, a consultant with Health Policy Alternatives Inc. in Washington. James was the chief health analyst at the Senate Finance Committee during the drafting of the BBA. "There are some legitimate questions to ask about how HCFA has focused on meeting the President's priorities when it also has told Congress it doesn't have enough resources and it is short-staffed," she says. President Clinton earlier this year instructed HCFA to put in place his Patient Bill of Rights for all Medicare and Medicaid enrollees, which HCFA did when it published Medicare+Choice regulations this summer.

But DeParle has dismissed the contention that the President's agenda has outweighed BBA priorities.

Unlike Congress, the health-care industry has praised HCFA's communication efforts, chiefly those about pending Medicare and Medicaid changes, including the new Medicare+Choice options. "They've been very open with us," says Dean Rosen, senior vice president for policy at the Health Insurance Association of America. Rosen previously served as counsel for the House Ways and Means Committee's health panel, where he helped draft the Medicare provisions of the BBA.

Y2K Takes Precedence

This summer, the BBA got knocked out of its king-of-the-hill position on DeParle's priority list by a bigger bully: the year 2000 problem.

In late June, an internal HCFA memo leaked to the press revealed the agency had underestimated the severity of its Y2K situation. Money from other projects had to be diverted to fix about 50 million lines of code in more than 180 computer systems. Faced with the possibility that HCFA would not be able to correctly process claims at the turn of the century, DeParle moved Y2K ahead of the BBA on her priority list, angering Rep. Bill Thomas, R-Calif., chair of the House Ways and Means Health Subcommittee.

"I am very disappointed to hear of the administration's failure to implement Balanced Budget Act changes and its plan to delay payment updates for the doctors and hospitals who care for our seniors," Thomas said.

At a July hearing before Thomas' subcommittee, DeParle said she was sorry Congress had learned of the change in HCFA policy from a leaked memo rather than directly from her.

But DeParle said HCFA had no choice but to devote its full attention to the Y2K problem or face serious computer failures at the turn of the century.

Thomas' panel also criticized HCFA for scaling back the beneficiary information campaign set for this fall. The BBA called for a massive nationwide mailing explaining the new Medicare+Choice options, a handbook, a phone system and a Web site in what some observers called the largest education effort ever undertaken by a federal agency. HCFA planned to tailor the handbooks to each area of the country, explaining new plans and making cost and benefit comparisons.

Instead, HCFA announced this summer that its fall information campaign would be a pilot project in five states. Beneficiaries elsewhere will receive a brief outline of Medicare+Choice options emphasizing that Medicare enrollees can remain in their current plans. HCFA will extend the campaign nationwide in phases.

A congressional staffer says the delay is due to internal opposition at HCFA to changing Medicare. "There are a lot of people at HCFA who are skeptical of Medicare+Choice. Many people in the organization have this mentality that the traditional Medicare program is the way to go. A lot of them don't want to see major change," the staffer says.

House Ways and Means Committee spokesman Ari Fleischer also says HCFA is dragging its feet. "There have been several bad indications that HCFA may not be up to the task of giving senior citizens the information they need to make choices," Fleischer says. "HCFA has assigned so many of its resources to the year 2000 that it's giving short shrift to senior citizens who need to make decisions about their health plans. HCFA hasn't made a compelling campaign that it can't do both."

But Marion Ein Lewin, an Institute of Medicine analyst who led a study of HCFA's education campaign, says the BBA did not give HCFA enough time or money to prepare the campaign. Congress allotted $95 million for the effort, though HCFA had requested $200 million.

Since HCFA doesn't yet have the infrastructure to handle the large-scale distribution of information required by the BBA, Lewin says, the phased-in approach is a smart way to manage the project. "If you do this in steps and phases, you can learn as you go along," Lewin says. "If you make mistakes, you can improve them in the second round."

Learning from Today

Observers within and outside the agency say the past year has been the most challenging in HCFA's history. While the dust is far from settled and many challenges remain, the agency has accomplished most of the BBA-mandated changes and completed the staff reorganization.

"Everyone needs to take a deep breath and realize these are historic changes," Rosen says. "Congress clearly intended this to be a big change and sent a strong signal to HCFA that they should think of themselves as payers of a private health system rather than basically operators of a fee-for-service program. In some cases, they are clearly not meeting the goals of the BBA. Do they have reasons? Yes. Are they under tremendous strain? Yes."

Systems people at HCFA will continue for the next year and a half to tackle the year 2000 problem. Policy people will complain that they've worked extremely hard to make regulatory and policy changes, only to have the changes halted at the systems door because of the millennium bug. But at least they'll be moving in the same general direction. Managers and employees in various components of the agency have started communicating with each other and learned--the hard way--the true value of prioritization. And Dan Waldo's project management model has won over many agency managers to the importance of project planning and tracking.

When final provisions of the BBA take effect in 2002, DeParle predicts her agency will have gained from the pain.

"This is the first time we've managed something this large," DeParle says. "We did it with a project management team model, and I see managers now using it in their own activities. Having gotten through the most challenging time in HCFA's history, we will have a better managed agency."

But HCFA doesn't have much time to think about the future. "Their plans at the moment are to survive," says former OMB analyst Etheredge. "Until they get the BBA implemented and the Y2K problem solved, their thinking is, 'Once we know we can survive, then we'll get on to thinking about the future.' "

Grading Government

Government Executive will closely examine management at HCFA and 14 other federal agencies as part of the Government Performance Project--a comprehensive review of federal management practices--in our February 1999 issue. For more information, go to www.govexec.com/gpp.