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CMS Has Not Performed Required Close Outs of Contracts Worth Billions

Maria Johnson, a team leader for the Office of Evaluation and Inspections, is interviewed by Linda Ragone, Regional Inspector General for the Office of Evaluation and Inspections in Philadelphia.

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[Linda Ragone] I'm Linda Ragone, Regional Inspector General for the Office of Evaluation and Inspections in Philadelphia. I'm speaking with Maria Johnson, a team leader in our office to discuss the recent report on contract closeouts at the Centers for Medicare & Medicaid Services, known as CMS. You looked at the closeout status of CMS contracts as of February 2014. What did you find, Maria?

[Maria Johnson] CMS had not closed out $25 billion dollars' worth of completed contracts, which is required by Federal regulations. We found that over 6,000 contracts were overdue for closeout, and many of them were long overdue.

[Linda Ragone] Tell us a little bit about the contract closeout process.

[Maria Johnson] Sure. A contract is closed once the contractor completes its job, and the Government has completed all required actions. According to The Federal Acquisition Regulations, contracts must be closed within certain timeframes.

[Linda Ragone] So what happens when the contract isn't closed within that timeframe?

[Maria Johnson] Well, in general, the money set aside for a contract cannot be used to pay contractors after five years. So if CMS discovers at closeout that it owes money to a contractor, it can't use money it previously set aside for that contract to pay contractors after the five year period. Instead, CMS must use current year funding to pay the debt.

[Linda Ragone] Why is the contract closeout process so important?

[Maria Johnson] It's an important step in managing contracts, since it's usually the last chance for an agency to detect and recover improper payments. So these delays put agency funds at risk.

[Linda Ragone] What about money owed to CMS? Does that fall into the 5 year timetable?

[Maria Johnson] Yes, if contractors owe money, it may not be payable to CMS after five years. Once the appropriation account is closed, any repayments go to the U.S. Treasury, not to CMS.

[Linda Ragone] This creates a financial risk to CMS, right?

[Maria Johnson] Yes. And a lot of contracts completed prior to FY 2011 were overdue for closeout by 5 years or more. One contract even had a closeout due date back in 1995. Combined, these specific contracts totaled $5 billion dollars.

[Linda Ragone] During this inspection, you interviewed CMS staff about the closeout process and barriers to closing out these contracts. What did they have to say?

[Maria Johnson] One of the major barriers is that CMS can't close out a type of contract known as a cost-reimbursement contract. That's because indirect cost rates aren't always finalized timely for these types of contracts.

[Linda Ragone] Ok, what is an indirect cost rate?

[Maria Johnson] It's a rate used to determine how much the government will reimburse contractors for things like administrative and overhead costs. There have been some major delays in finalizing these indirect cost rates.

[Linda Ragone] Did CMS staff explain the reason for the delays?

[Maria Johnson] They did. They explained that the agency providing the majority of a contractors' funding is responsible for finalizing these indirect cost rates. For CMS's for-profit contracts, the National Institutes of Health usually handles finalizing these rates. Staff told us that some contractors don't submit their indirect costs in a timely manner, and there are inadequate resources and insufficient staff levels to finalize these rates.

[Linda Ragone] Your study also found that key pieces of information were missing from CMS's contract management system.

[Maria Johnson] Yes. We found that some contract financial data is not part of the contract management system. We also found that some data were inconsistent and conflicting, like contracts marked "closed," but the closeout date was missing. We also found that certain key pieces of contract information, such as project description, could not be easily retrieved from the system.

[Linda Ragone] What recommendations did you make in your report?

[Maria Johnson] We made four recommendations to CMS. First, CMS should implement more strategies to meet regulatory timeframes for closeout. Second, CMS should determine the status of contracts with an undetermined closeout status. Third, CMS should add additional data to CMS's contract management system and improve reports for easier access to contract data. Lastly, CMS should improve coordination and collaboration across departmental staff with contract closeout responsibilities.

[Linda Ragone] What did CMS say about these recommendations?

[Maria Johnson] CMS agreed with all four of our recommendations and it has already started making changes. CMS stated that since February 2014, it closed an additional 2,077 contracts resulting in nearly $30 million in contract fund adjustments. It also upgraded the contract management system to improve its contract tracking and reporting capabilities. CMS also noted that it's working to implement several other tools to help track spending and automate the invoicing process.

[Linda Ragone] Thank you, Maria, for sharing this important work on contract closeouts.

[Maria Johnson] Thank you.