Testimony Before The Senate Appropriations Committee
Senator Ray Holmberg, Chairman
House Bill 1012 - Replacement of the Medicaid Management Information System (MMIS)
March 1, 2005
Chairman Holmberg, members of the committee, I am David Zentner, Director of Medical Services for the Department of Human Services. I appear before you to provide information regarding the replacement of the current Medicaid Management Information System (MMIS).
The federal government requires each state to operate a certified MMIS. If states fail to implement an MMIS or a system fails to meet certification guidelines, the federal government will reduce the 75% administrative match that is permitted for the operation of a certified system. Currently, federal funding at 90% is available to design, develop and implement a new system. In order to receive certification, each system must be reviewed by the federal government to ensure that the system will meet the specifications required in the federal regulations. North Dakota is one of 14 states that process their own claims.
The MMIS is a complicated set of software programs that work together to ensure that payments for medical services are processed in a timely and accurate manner. Through a system of program edits and audits, it performs a vast array of checks such as ensuring the recipient is eligible, ensuring the provider is eligible and ensuring the service is within program guidelines. It prices claims, accounts for all payments, and maintains a history file of all claims. It is designed to detect problems such as duplicate services, services beyond program limits, and ensuring that prior authorization requirements have been met. It ensures that Medicaid payments are not made until medically needy recipients have incurred their monthly recipient liability. If the system detects a problem, it will either automatically deny the claim, or suspend it for review by a claims auditor. If the auditor can fix the problem, the suspended claim can be reentered and paid. The MMIS also produces a variety of reports that are used to manage the program and identifies potential fraud and abuse issues.
Since each Medicaid program has unique requirements, it is necessary to modify any existing system to meet the individual needs of each state. North Dakota will incur the cost of developing an MMIS that meets our unique needs regardless of where the operations will occur.
North Dakota implemented the current MMIS in the fall of 1978. At that time it was a state of the art system. Electronic Data Systems (EDS) took their system that was operating in Indiana and modified it to meet the unique needs of the North Dakota Medicaid program.
The system is now more than 26 years old. It has been modified and enhanced countless times, and operates in a batch process. The current software architecture is not flexible and is no longer capable of meeting our business needs. For example, the state auditors office noted in a recent audit report that the system is no longer capable of properly detecting potential duplicate billings in all instances. Minor policy changes often involve prolonged and complicated “hard coding” that requires extensive resources, and often leads to additional problems because of all the patches that have previously been made to the system. Major program enhancements such as the conversion to the HIPAA compliant coding requirements caused major processing problems, and were the direct cause of the claims backlog the Department experienced during the last half of 2003 and the first few months of 2004. We know that additional HIPAA required modifications are coming, and we are concerned that the MMIS could be overwhelmed if another major modification needs to be done before the system can be replaced. In addition, the fraud and abuse detection tools are not sophisticated and manual review is often required because of system limitations. Those are some, but by no means not all, of the problems we face with the current system.
In order to begin the process of replacing the outdated system, the Legislature appropriated $1.6 million of which $160,000 is general funds during the current biennium. The funds are being used for the planning phase for the project. We obtained approval from the Center for Medicare and Medicaid Services (CMS) for 90% federal funding for this phase of the project. In order to assist us in the initial planning and design phase of the project, we issued a Request for Proposals (RFP). A total of five vendors responded, and we selected FOX Systems Inc. They began work in the spring of 2004 and they conducted a series of meetings with staff to document the business needs for the new system. They have completed a series of documents that will be used as a basis for moving ahead with the implementation of the MMIS if the Legislature agrees to proceed with this project. It is estimated that their work will be completed before the end of the current biennium. FOX Systems Inc. is prohibited from bidding on the actual development and implementation of the MMIS because they assisted the Department in this phase of the procurement process.
Currently, CMS does provide 90% funding for the design, development and installation of a new system. In order to receive the enhanced funding, we are required to submit for approval an Implementation Advance Planning Document (IAPD). The IAPD provides information about the current system, why a new system is necessary, the activities we expect the system to perform, the alternatives we may use to procure and operate a new system, cost information, and information on how we would manage the project. This document was submitted to CMS on December 3, 2004, and the Department received a notice of approval of the 90% funding for the MMIS on January 5, 2005.
The Governor's budget included funding for the design and implementation of a new MMIS. The House removed all funding for the new MMIS from the Department's Appropriation Bill. The Department is very concerned that if we do not proceed with a replacement system in the next biennium we will be faced with a potential system failure and the potential missed opportunity to receive 90% federal funding for the project. The following points illustrate the need for the Senate to reinstate the funding for this project.
- The State Information Technology Advisory Committee rated this project as the second highest priority of all major Information Technology projects proposed for the next biennium. This is an indication that there is justification to proceed with this project.
- The Bush administration is proposing to place a cap on administrative costs that can be claimed for the Medicaid program including the elimination of 90% federal funding. Any delay in approval of this project could result in the loss of a large portion of the federal funding and could put the entire project in jeopardy.
- The federal government provided 90% federal funding for the planning phase of the project. If we do not proceed with the MMIS project the federal government can request return of funds expended for the planning process. The federal share of the planning process will total more than $1 million. In addition, no planning funds would be available in the future if we determined at a later date to proceed with a new MMIS.
- At least 11 other states are planning to release RFP's during this calendar year. If we delay the issuance of our RFP, we will be competing with a number of large states for a limited number of vendors that are capable of meeting our business needs. As a result we may have a limited number of vendors interested in bidding on our project if we delay the issuance of the RFP for any extended period of time. Attachment A (40kb pdf) shows the other states that are interested in procuring a new MMIS in the near future.
- The system is relied on by thousands of providers of service including those who receive the bulk of their income through this payment process. More than 2.5 million claims are processed yearly and more than $500 million flow through the system each year. It is imperative that we have the most sophisticated system available to ensure that providers are paid in a timely and accurate manner. I doubt that any health insurance company would rely on a 26-year-old system to process and pay claims.
If funding is restored, the next step entails the release of a Request for Proposal (RFP). The RFP is the document that describes the business needs that includes detailed specific requirements for the new system. In order to obtain federal funds, it is necessary to have an open bid process. The RFP also outlines the bid process including timeframes for submitting a response and evaluation criteria. The RFP will also detail how we will operate the system after it is implemented.
Before we release the RFP, a decision must be made as to what direction we will take in procuring a new system including who will operate it after the system is implemented. FOX Systems, Inc. has completed a cost benefit analysis of seven options that are available for consideration. The MMIS replacement project handout contains a list of those options, the estimated costs associated with those options and the return on investment for each option. After careful analysis of costs and risks, we concluded that two options were the most feasible to consider at this time. The two options include retaining all aspects of the MMIS within state government referred to as a turnkey operation or contracting out most of the activities including data center/technical support, claims processing and provider relations to a fiscal agent. The handout outlines some of the benefits and risks of each option and was prepared by FOX Systems Inc.
We recommend that the system remain within the Department of Human Services and the Information Technology Department.
We base our recommendation on the following.
- Cost: Over the first eight years of operations, it is estimated that a fiscal agent contract would cost at least $13.6 million more, of which about $3.4 million would be state funds, than if the system was operated within state government. The handout details the estimated costs for each of the options based on information prepared by FOX Systems, Inc.
- Cost Comparison: The Department's current MMIS operating expenses are efficient when compared to other states. We have the second lowest percentage of administrative costs to payments in the country at 1.12% for those states that have less than $1 billion in annual expenditures. The handout shows a comparison of the 10 states with less than $1 billion in expenditures based on costs submitted to the federal government.
- Accountability: Currently, the buck stops at the door of the Medicaid Director's office when issues arise regarding payment for services. If a problem or crisis arises, it can be dealt directly with the staff I supervise or other Department staff who are readily available to resolve the issue. If we contract for those services we will deal with contractor staff that may or may not be responsive to the specific crisis. I don't mind the responsibility and the blame that comes with it; but it is also important to have the immediate authority to resolve the issue.
- Timeliness: Providers have criticized the Department over the past year because of our claims backlog. This backlog was the direct result of the problems with the MMIS because of the addition of the transaction code sets required by HIPAA. In the years when the system was operating efficiently, we paid 95% to 98% of our claims within 30 days of receipt in our office. We are confident that when a new MMIS is implemented our staff will return to processing claims at that level again. We have been able to dramatically reduce the backlog of claims by 47,000 since October 2003 and are now processing about 94% of our claims within 30 days of receipt. You have excellent employees working for you, and if given the ability to work with a state of the art system, they will again be processing 98% of claims within 30 days. In addition we are able to respond to specific requests from providers in order to avert a crisis such as agreeing to provide funds in order that a nursing facility can make payroll because a billing problem on their end delayed the submittal of claims to our office.
- Job Loss: If we use a fiscal agent the state will lose about 40 full time jobs, many of whom have been hard working and loyal employees for the citizens of North Dakota. At the present time there are about six vendors with an MMIS in production. It is likely that all may bid on the contract if we opt to use a fiscal agent. Depending on who submits the best proposal, many of these lost jobs could be outsourced to other areas of the country.
- System Maintenance: If funding is restored, the new MMIS will likely not be implemented until late 2007. It will be necessary to maintain the current MMIS and also process claims during that period of time. If a decision is made to use a fiscal agent, it is likely that the 40 affected people will look for other employment and will leave before the new system is implemented. If this occurs we will lose the valuable knowledge necessary to ensure the new system will meet expectations in accordance with our policies and will substantially affect our ability to maintain the current system and pay claims through 2007 in an efficient manner. It would be very difficult to replace lost workers because the new employees would know their jobs would disappear in 2007.
- Ease of Changes: One of the super aspects of a new system will be the ability to effect changes in the system in a short period of time without involving technical staff. We anticipate using our business analysts to make these changes. If we utilize a fiscal agent, it will be necessary to prioritize and report those changes to the contractor who in turn will update the system resulting in possible delays and miscommunication.
- Hidden Costs: System changes and change orders are inevitable. While a contract with a fiscal agent will have a certain amount of system maintenance built into the price, it is likely that any major system changes will require additional costs and time. Contractor time for this service is generally at least three times the cost of using state staff to accomplish the same job. Once state staff are no longer available, we will be required to rely on outside contractors to provide both claims processing and technical services that will likely be expensive. For example, the increase in Healthy Steps premiums for the current and next biennium will average 10% per year and we are charged thirty-five cents a claim by Nordian Mutual Health Insurance Company for them to send Medicaid claims to our office that they simply strip off of their system and forward to our office for processing.
- Fiscal Agent Costs: A review of fiscal agent costs from two comparable states indicates that a fiscal agent contract including necessary state staff would exceed the cost of maintaining the system within state government. Detailed information is included in your handout. In addition, we examined the cost of implementing HIPAA in North Dakota with surrounding states many of which contract with a fiscal agent. The handout indicates that North Dakota spent the least amount of any of the states in this review.
- Other state comparisons: The regional office of CMS in Denver has indicated to us verbally that the states that use a fiscal agent in the six state region have costs that are higher than those states that use their own staff to process claims.
The Department built the budget for the MMIS based on the assumption that the state would continue to operate the system. The costs were estimated prior to the completion of the cost benefit analysis by FOX Systems, Inc. The cost estimate, which is included in the Governor's Executive Budget, is $29.2 million, of which $3.7 million is general funds. At the present time the MMIS must access two different eligibility systems in order to verify eligibility for the program. The Technical Eligibility Computer System (TECS) is also a very old system and is still used to determine Medicaid eligibility for most of the aged, blind and disabled individuals on the program. The newer more sophisticated Vision system determines eligibility for the remainder of the Medicaid population. It will be possible to access eligibility information from both systems that will allow real time claims processing through the use of cutting edge architecture in the new MMIS. However, reliance on an eligibility system nearly as old as the existing MMIS is risky. This part of the project will reduce the workload for county eligibility staff and consolidate the entire eligibility process for Medicaid and Healthy Steps into one computer system. Because of the anticipated delay in the start of the new MMIS, it is likely that the final implementation of the TECS to Vision project will also be delayed until the next biennium. However, most of the design and development work can be completed in the 2005-2007 biennium. The cost of making this change is estimated at $1.9 million of which $.9 million is general funds. Eligibility system matching rates are limited to 50% federal funding.
We had originally anticipated implementing the MMIS by the end of the next biennium. This original timetable would have required a release of the RFP in January 2005 and selection a contractor by July 2005. It is anticipated it will take at least 24 months to complete the project. We were informed that the Legislature wished to have input to determine if the state should use a fiscal agent or retain the operation within state government. For this reason we delayed release of the RFP and established a new timetable as it was no longer possible to select a contractor in July 2005. We were hoping that the Legislature would provide guidance early in the session because the timetable anticipated the RFP would be released by March 14, 2005. Since the funding was stripped from the Department's budget it will not be possible to meet the timeframe that is detailed in Attachment B (20kb pdf). If the Legislature decides to reinstate funding for this project, the timeframe would need to be adjusted based on the timing of the final decision and the direction selected for ongoing operations.
I would be happy to respond to any questions you may have.