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2005 Testimony

Testimony Before The House Appropriations Committee

Representative Ken Svedjan, Chairman

Regarding House Bill 1012 - Replacement of the Medicaid Management Information System

January 6, 2005

Chairman Svedjan, 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. 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 13 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. It 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 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 software architecture is not flexible and no longer is 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 more required HIPAA modifications are coming and we are concerned that the MMIS could be overwhelmed if another major modification is required 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 are in the process of completing 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 within the next month.

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 advanced 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 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. FOX Systems Inc. is assisting us in the preparation of this document.

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 has completed a cost benefit analysis of seven options that are available for consideration. See Attachment A (12kb pdf) for a list of those options. 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. Attachment B (12kb pdf) outlines some of the benefits and risks of each of the two options.

While we realize the ultimate decision rests with the Legislature, we recommend that the system remain within the Department of Human Services and the Information Technology Department.

We base our recommendation on the following.

  1. Cost: Over the first ten years of the project, 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. Attachment C (4kb pdf) details the estimated costs for each of the options based on information prepared by FOX Systems.
  2. Cost Comparison: The Department's current operating expenses relating to the MMIS is efficient when compared to other states. We have the second lowest percentage of administrative costs to payments in the country at 1.12 percent. Attachment D (8kb pdf) shows a comparison of the 10 most efficient systems based on costs submitted to the federal government.
  3. Accountability: Currently, the buck stops at the door of the Medicaid Director's office when issues arise regarding payment for services. If I have a problem or a crisis, I can deal directly with 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 I also want the immediate authority to resolve the issue.
  4. 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 percent 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.
  5. Job Loss: If we use a fiscal agent the state will lose about 40 full time jobs many of who 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.
  6. System Maintenance: 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.
  7. 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 causing possible delays and miscommunication.
  8. Hidden Costs: System changes 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.

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. The cost estimate which is included in the Governor's Executive Budget is $29.2 million of which $3.7 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 was predicated on having a contractor ready to start work in July 2005. It is anticipated it will take at least 24 months to complete the project. We understand that the Legislature wishes to have input to determine if the state should use a fiscal agent or retain the operation within state government. It will be necessary to make a final decision on which road to follow prior to releasing the RFP to potential vendors. Since we will be unable to release the RFP until we receive direction from you, it will not be possible to select a contractor by July 1, 2005. We request that you provide us with guidance on this issue at the earliest possible date so that we can begin the RFP process as soon as possible if the decision is made to fund the new MMIS. The estimated timeframe for implementation is detailed in Attachment E (16kb pdf). We would appreciate your final determination prior to March 14, 2005 so the RFP may be issued.

I would be happy to respond to any questions you may have.


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