The Health Care Financing Administration (HCFA) was the federal agency responsible for overseeing two of the largest public health insurance programs in the United States. Established in 1977, the agency was tasked with managing the financial and administrative aspects of Medicare and Medicaid under the Department of Health, Education, and Welfare, which later became the Department of Health and Human Services (HHS). HCFA no longer operates under this name, as the organization was formally renamed in 2001 to become the Centers for Medicare & Medicaid Services (CMS). The history of HCFA details how the federal government first attempted to centralize the administration and financing of its rapidly expanding healthcare commitments.
The Original Mandate: Program Management
HCFA was created to consolidate the management of two distinct programs that had previously been scattered across separate agencies within the federal structure. Before 1977, the Social Security Administration (SSA) administered Medicare, while the Social and Rehabilitation Service (SRS) was responsible for Medicaid. This fragmented approach made coordinating policy and finances difficult for programs that often served overlapping populations.
The agency’s primary administrative responsibility was the operational oversight of Medicare, which provides health insurance for individuals aged 65 or older, certain younger people with disabilities, and those with End-Stage Renal Disease. Simultaneously, HCFA managed the federal portion of the joint federal-state Medicaid program, which provides medical assistance to low-income and vulnerable populations. This structure required HCFA to coordinate with state governments, which maintained significant autonomy over their specific Medicaid programs, while ensuring compliance with federal guidelines.
This centralized management was intended to improve the solvency and accessibility of these programs for millions of beneficiaries. HCFA was tasked with administering a vast flow of funds, which by 2001 represented a significant portion of all national health spending. Its work involved processing claims, setting eligibility rules, and ensuring beneficiaries were aware of the services to which they were entitled.
Setting Payment and Quality Standards
HCFA’s influence extended far beyond simple program administration, as it became the primary federal authority for establishing national healthcare policy. The agency used the enormous purchasing power of Medicare and Medicaid to standardize how healthcare providers operated and were reimbursed. This led to the development of reimbursement methodologies that changed financial incentives within the US healthcare system.
In the 1980s, HCFA implemented the Prospective Payment System (PPS) for inpatient hospital services, which introduced the use of Diagnosis-Related Groups (DRGs). Under this system, Medicare paid hospitals a fixed, predetermined rate for a patient’s stay based on their diagnosis, rather than reimbursing the hospital for all costs incurred. This mechanism was a direct attempt to control rising healthcare costs by incentivizing hospitals to provide care more efficiently.
To standardize billing and claims processing across the country, HCFA also developed the Health Care Financing Administration Common Procedure Coding System (HCPCS) and the standardized professional claim form, the HCFA-1500. Furthermore, the agency was responsible for developing and enforcing health and safety standards for all healthcare facilities that wished to receive federal funding through Medicare or Medicaid. HCFA utilized regulatory bodies, such as Peer Review Organizations (PROs), to audit facility compliance and monitor the quality and appropriateness of care being delivered.
The Transition to CMS
The Health Care Financing Administration was officially renamed the Centers for Medicare & Medicaid Services (CMS) in 2001. This transition was announced by the Secretary of Health and Human Services as part of a reform effort intended to signal a new focus for the organization. The goal was to move away from the perception of the agency as purely regulatory and bureaucratic to one that was more cooperative and service-oriented.
The shift reflected a desire to modernize the agency and emphasize quality of care alongside financial management. The reorganization involved structuring the agency into three distinct centers of service, each focused on a specific area of operation. These centers included the Center for Medicare Management, the Center for Medicaid and State Operations, and the Center for Beneficiary Choices.
While the name and internal structure changed, CMS continued to perform all the core functions previously handled by HCFA, ensuring continuity in the administration of Medicare, Medicaid, and other programs. CMS today addresses modern challenges, such as implementing new health insurance marketplaces and focusing on value-based payment models. The legacy of HCFA remains visible, particularly in the medical billing industry, where the standardized claim form is still informally called the “HCFA form” by many providers.