oversight

Lengthy Delays in Settling the Costs of Health Services Furnished Under Medicare

Published by the Government Accountability Office on 1971-06-23.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                                               LM095616




Len       days In
The Costs
Furnish
                                   B-164031   (4)



Social Security   Administration
Department of Health, Education,
  and Welfare




BY THE COMPTROLLER GENERAL
QF THE UNITED STATES
               COMPTROLLER     GENERAL     OF      THE   UNITED   STATES
                             WASHINGTON,    D.C.     20548




B- 164031(4)




To the President   of the Senate and the
Speaker  of the House of Representatives

        This is our report   on the lengthy delays in settling    the
costs of health services    furnished   under Medicare    which is
administered    by the Social Security    Administration,   Depart-
ment of Health, Education,      and Welfare.

         Our review  was made pursuant   to the Budget and Ac-
counting    Act, 1921 (31 U.S.C. 53), and the Accounting  and
Auditing    Act of 1950 (31 U.S.C. 67).

        Copies of this report    are being sent to the Director,
Office   of Management    and Budget,    and to the Secretary    of
Health,   Education,   and Welfare.




                                                     Comptroller           General
                                                     of the United         States




                      50TH ANNIVERSARY                   1921-1971
COMPTROLLERGENERAL9S                           LENGTHY DELAYS IN SETTLING THE COSTS OF
REPORTTO THE CONGRESS                          HEALTH SERVICES FURNISHED UNDER MEDICARE
                                               Social Security  Administration
                                               Department  of Health,   Education, and Welfare
                                               B-164031(4)


DIGEST
------

WHYTHE REVIEW WASMADE
             Federal payments to institutions       for health     services    provided to Medi-
             care patients     usually  are made through    fiscal    intermediaries.     These
             int%%ediaries      serve under contracts    made with the Department       of Health,
             Education,     and Welfare   (HEW) and administered      by the Social Security
             Administration     (SSA).

             For fiscal  years 1967 through     1969, institutions      were paid about         $11 bil-
             lion for their   costs of furnishing    services      to Medicare patients.          About
             $10 billion   was paid to hospitals.

             Payments to institutions           are made initially      on an estimated     basis but
             are subject       to adjustments      at the end of the institutions'        Medicare re-
             porting    periods , after     the intermediaries        have determined    the institu-
             tions'    actual    and reasonable      Medicare-related     costs.    This procedure
             culminates      in a final    settlement     between the intermediary       and the in-
             stitution     and is referred       to as the settlement      process.

             The principal   Medicare fiscal       intermediary     is the Blue Cross Associa-
             tion which has subcontracted        its functions      as intermediary  to 74 in-
             dividual   Blue Cross Plans.

             The General Accounting       Office   (GAO) made a review to find out the causes
             for lengthy    delays in the settlement       process and to suggest ways t.rT;‘""."'""'
             minimize   the delays.      The 13 Blue Cross Plans included      in the GAO review
             were located      in 10 States    and dealt with about 32 percent of the 6,800
             hospitals    participating     in the Medicare    program at September 30, 1970.


FINDINGS AND CONCLUSIONS
             Because of the lengthy       delays by fiscal       intermediaries      in completing
             the settlement   process,     billions     of dollars     of Medicare funds paid
             out on the basis of the       estimated      cost of services      long since incurred
             have not been afforded       an appropriate      final    accounting   or a timely    re-
             view by the intermediaries          and the Federal Government.

             At September 30, 1970, over 3 years after              the end of the reporting  pe-
             riods for the first year under Medicare,             final  settlements  for the


Tear Sheet

                                                   B                   JUHE23,19             7 1
cosl. of care provided       had been made with only 68 percent of the hos-
pitals   -i::ctud~C/ in the GAO review.      Furthermore,    at that date, over
2 yeari- after      the end of the reporting     periods for the second year
under Medicares        Final settlements  for the cost of care provided     had
tieen made w+th only 38 percent of the hospitals           included  in the GAO
review.

There were delays in every step of the settlement             process,  from the
preparation     of cost reports     by hospitals,    through the audit of cost
reports    by intermediaries,     to the final    settlement   or agreement with
hospitals    concerning     their actual and reasonable      Medicare costs to
be reimbursed     under the program.

Intermediaries      and hospitals   attributed     some of the delays      to SSA's
administration      of the program.

   --There     have been problems with certain        SSA-generated      financial
      and statistical       data (reimbursement    report)    intended     to assist
      hospitals     in preparing    their  Medicare cost reports        and to guide
      intermediaries      in making audits    and final    settlements.        (See
      ppo 15 to 18.)

   --Some intermediaries     delayed making final     settlements     with hospitals
      because a method of apportioning      hospital    costs between Medicare
      and non-Medicare   patients   which was authorized      by HEW resulted     in
      Medicare payments that included     certain    private   room costs, which
      were not covered under the program, and certain          delivery    rocm costs,
      which were not applicable     to Medicare patients.

     On the basis of an analysis    of a sample of cost reports      for hos-
     pitals  in 32 States and Puerto Rico, GAO believes       that the elimi-
     nation of this questionable    apportionment!method     (combination
     method) would reduce Medicare payments to hospitals         by between
     $100 million  and $200 million   annually.      (See pp* 19 to 32.)

Reasons    for delays in the various    steps     in the settlement      process   are
outlined     in the following sections.

De1zg.s ?I% subtissz:on    of   cost   reports

For the first     year's     reporting     periods,     only 7 percent   of the hospitals
submitted   their    reports     within    90 days after     the end of their   reporting
periods,   as prescribed        by SSA. On the average most of the remaining
hospitals   wer, 1~1about 4 months late.            GAO did not note any improvement
in the submission       of second-year        cost reports     but did note some improve-
ment in the submission          of third-year       cost reports.     GAO noted that cost
reports   had been submitted          late because of

  --inadequacies      in hospital accounting  systems and insufficient     numbers
     of hospital     employees capable of preparing   the reports    (see pp. 42
      to 44)and



                                       2
I
I                      --delays    by public accounting  firms employed by the hospitals    in
I                         completing   their audits before submission   of the cost reports
I
I                         (see PPe 44 to 46).
I
I
I                    Delays   in initial    seviews
I
I
I                    Many intermediaries  did not complete            their   initial         reviews   for   periods
I                    of from 1 to 3 months because

                       --the     cost reports  were incorrect    or incomplete               and either     were
                           returned   to the hospitals    or were held by the                intermediaries
                           pending the recefpt     of additional   information               (see p. 52) or
i
I                      --the intermediaries          did not have sufficient         staff      to make the re-
I                          views9 particularly         at times of peak work       loads       (see pp. 53).
I
I
I                    Delays   in making    fisld     audits
I
I
I                    For the first    3 years under the Medicare program,    intermediaries     sched-
I                    uled for field    audits virtually all the cost reports      of the hospitals
I
I                    included   in the GAO review.
I
I                      --For some intermediaries      that made field    audits with their   own staffs,
I                         delays in starting    the audits   were caused by an uneven audit work
I
I
                          load because many hospitals      serviced   by an intermediary   had the same
I                         reporting  periods.     (See pp. 61.)
I
I
I                      --For some intermediaries     that subcontracted     the audit function,     de-
I                         lays of from 3 to 6 months in starting        the audits  occurred    because
I
I                         of difficulties  in obtaining   SSA approval     of the audit subcontracts.
I                         (See pp- 62 to 64,)
I
                     DeZaus in makinu      find      settlements
I
I                    After    the field  audits were completed,   final settlements    were delayed
I                    further     because of disagreements  between the intermediaries       and the
I
I                    hospitals     as to the proper amounts of Medicare-related      costs.                                .
I
1                    GAO believes     that there is a need for more direct    involvement    of the
I
    I                prime contractor      (Blue Cross Association) in bringing     about final
    I                settlements    in those cases in which audits    have been completed for some
    I
    I                time,     (See pp. 75 and 76.)
    I
    I
    I                There have been similar     delays in making settlements       with extended-
    I                care facilities.     These delays are especially     significant    because of
    I
    I                the large number of extended-care     facilities   that have left      the Medi-
    I                care program without    having made settlements    with intermediaries.
    I
    I
                     (See. pp. 77 to 80.)
    I
    I
                     Unless improvements          in the several    steps of the settlement      process           are
    I                made, the Medicare          payments --amounting    to billions  of dollars--that              have
    I
    I
    I   Tear
        ____ Sheet
                                                                                                            I
                                                                                                            I ~
                                                                                                           I
                                                                                                           I
                                                                                                           I
                                                                                                           I
       not been afforded     an appropriate   final accounting   can be expected to in-                    I
       crease and reports     to HEW and congressional    bodies on Medicare reimburse-                    I
       ments to institutions     will   not be based on the most current   and accu-                       I
                                                                                                           I
       rate data.                                                                                          I
                                                                                                           I
                                                                                                           I
                                                                                                           I
RECOMMEX~ATIONS OR SYGGESTIONS                                                                             I
                                                                                                           I
                                                                                                           I
       The Secretary     of HEW should provide for SSA to take certain      actions    aimed               I
       at alleviating     the unsatisfactory  conditions   revealed  during the GAO                      I
       review.      (See pp. 32, 48, 56, and 75).     GAO's recommendations    include                    I
       having SSA:                                                                                       I
                                                                                                         I
                                                                                                         I
         --Establish      a definite     timetable    for 'the development     of effective,             I
                                                                                                         I
            useful,    and timely     reimbursement      reports  for use by hospitals       and         I
            intermediaries       in the settlement       process or consider     other alter-            I
            natives,     such as authorizing       intermediaries     to 'prepare the reports.           I
                                                                                                         I
            (See p. 32.)                                                                                 I
                                                                                                         I
                                                                                                         I
         --Discontinue     or modify the use of the combination   method'of      apportion-              I
            ing hospital    costs between Medicare and non-Medicare    patients.        (See            I
                                                                                                        I
            p. 32.)                                                                                     I
                                                                                                        I
                                                                                                        I
         --Encourage     hospitals    to adopt different     cost-reporting      periods to pro-        I
            vide a more even distribution         of intermediaries'        work loads and to           I
            facilitate     the preparation    and/or audit of cost reports          by the hos-        I
                                                                                                       I
            pitals'    accounting   firms.    [See p. 48.)                                             I
                                                                                                       I
                                                                                                       I
         --Require    the Blue Cross Association     to take a more active      role in the            I
            final  settlement   process by directly     assisting    those local Blue Cross            I
                                                                                                       I
            Plans that have the most serious       backlogs of audited     cost reports                i
            for which settlements     have not been made.        (See p. 75.)                          I
                                                                                                       I
                                                                                                       I
                                                                                                       I
AGENCY ACTIONS AND UNRESOLVEDISSUES                                                                    I
                                                                                                       I
                                                                                                     I
      HEW agreed,     in part, with some of GAO's recommendations            and did not agree       I
      with others.      Of particular   significance       is HEW's decision    to discontinue       I
                                                                                                     ,
      the use of the combination      method of apportioning        hospital    costs to the         I
      Medicare   program for larger     institutions       (e.g., having 100 or more beds).          I
                                                                                                     I
      HEW estimates     that this action will        reduce Medicare costs by $100 million          I
      in fiscal    year 1972.                                                                       I
                                                                                                    I
                                                                                                    I
      HEW's decision   to discontinue  the use of the combination          method will    re-       I
                                                                                                   I
      quire changes in the Code of Federal Regulations          pertaining     to Medi-            I
      care.  GAO believes    that HEW should consider     certain     other factors     be-        I
      fore such changes in regulations     are finalized.       (See pp. 34 to 37.)                I
                                                                                                   I
                                                                                                   I
      SSA intends   to try to solve       its problems in producing         reliable    and        I
                                                                                                   I
      timely  reimbursement  reports        for use in the settlement        process    rather     I
                                                                                                   I
                                                                                                   I
                                                                                                   I
                                                                                                   I
                                                                                                   I
                                          4                                                        I
                                                                                                   I
                                                                                                   I
                                                                                                   I
                                                                                                   I
                                                                                                   L
              than to consider a?ternatives   as recommended by GAO. GAO noted,
              however3 that some of the specific     actions cited by HEW to solve
              the problems had been attempted    previously  by SSA without solving
              the problems 0 (See pp. 33 and 34.)

              To facilitate--through           a more even distribution       of work loads over
              the year--both         the preparation    of cost reports      by the hospitals'
              accounting       firms and the processing        and auditing     of cost reports     by
              the intermediaries,           SSA is considering     a change in its instructions        to
              require     that Medicare cost reports          cover the same reporting       periods
              and have the same due dates as the hospitals'                 annual reports     to the
              Internal      Revenue Service.        GAO believes    that the SSA-proposed change
              has merit,       particularly     where it can be adapted to expedite          the overall
              settlement       process.      (See pp. 49 and 50.)

              HEW believes   that the Blue Cross Association's                 role in the Medicare
              program is essentially   an administrative    rather               than an operating
              one and that it does not have sufficient      staff              to become directly   in-
              volved in individual   hospital  cost settlements.

              GAO believes,       however3 that the role of the Blue Cross Association
              under its contract         with HEW should be to require          performance    from its
              subcontractors        (the local Blue Cross Plans) or to take such steps as
              may be necessary to fulfill               its contractual obligations.        Such steps
              could include       assisting      certain    Plans in making settlements       with in-
              dividual     hospitals,      particularly      where such settlements      at a particular
              Plan had been consistently              delayed for unduly long periods        of time
              after    audit.     (See pp* 75 and 76.)


    MATTERS FOR CONSIDERATION BY THE CONGRESS

                  During 1970 the cognizant       legislative       eomittees    of the Congress con-
                  sidered   HEW"s proposal    that institutions        providing   services  to Medi-
                  care patients    be paid o.n a prospective         basis rather   than on a retro-
                  spective,   reasonable-cost     basis.

                  The committees     concluded that reimbursement        on the basis of prospec-
                  tive rates should be authorized       on an experimental          basis only.        The
                  committees   pointed    out in their  reports   that a solid foundation              of
                  experience   was required     for all possible    alternative       forms of reim-
                  bursement before permanent changes were made. Although                   legislation
                  authorizing    the use of prospective     rates on an experimental             basis
                  was not enacted by the Ninety-first         Congress,     similar     legislation       was
                  introduced   in January 1971 in the Ninety-second            Congress.

                  This report   is being sent to the Congress because of its                 interest      in
                  the problems which have occurred       in the Medicare    program          relating      to
                  the reimbursement    of costs incurred    by the participating             institutions.


I
I   Tear
    _~--- Sheet
            -
                        c 0 n t-e   n t   s
                                                                Page

DIGEST                                                            1

CHAPTER

  1       FEATURESOF MEDICAREPROGRAMPERTINENT TO
          SETTLEMENTPROCESS
              Use of intermediaries   to administer
                part A
              Selection  of Blue Cross Association   as
                an intermediary
              Method of payment to providers    of ser-
                vice

  2       DELAYS IN SETTLEMENTSWITH HOSPITALS AT-
          TRIBUTED TO SSAOSADMINISTRATION OF PROGRAM             15
              Difficulties     with SSA-generated finan-
                 cial and statistical        data                15
              Elimination     of questionable      method of
                 apportioning     hospital    costs would re-
                 duce Medicare payments by more than
                 $100 million     annually                       19
              Conclusions                                        32
              Recommendations to the Secretary of
                 Health, Education,        and Welfare           32
              Agency comments and actions and GAO
                 evaluation                                      32

  3       DELAYS BY HOSPITALS IN SUBMITTING COST RE-
          PORTS                                                  38
              Causes of delays in submission of cost
                reports                                          41
              Conclusions                                        48
              Recommendations to the Secretary of
                Health, Education,  and Welfare                  48
              Agency comments and actions   and GAO
                evaluation                                       48

  4       DELAYS BY INTERMEDIARIES IN DESK AUDITS OF
          HOSPITAL COST REPORTS                                  51
              Intermediaries  that made both detailed
                 desk audits and tentative  settlements          51
CHAPTER                                                      Page

              Intermediaries    that did not make both de-
                 tailed   desk audits and tentative set-
                 tlements                                     54
              Steps taken by SSA to upgrade desk au-
                 dit function                                 55
              Conclusions                                     55
              Recommendation to the Secretary of
                 Health, Education,   and Welfare             56
              Agency comments and actions                     56

  5       DELAYS BY INTERMEDIARIES IN MAKING FIELD AU-
          DITS OF HOSPITAL COSTS                              57
              Delays in starting  field audits                57
              Delays in completion of field audits            65
              Conclusions and agency comments                 69

  6       DELAYS IN MAKING FINAL SETTLEMENTSWITH
          HOSPITALS                                          71
             Causes for delays in making final set-
                tlements                                     72
             Steps taken by BCA to make final settle-
                ments without agreements with hospi-
                tals                                         74
             Conclusions                                     75
             Recommendation to the Secretary of
                Health, Education, and Welfare               75
             Agency comments and actions and GAO
                evaluation                                   75

  7       DELAYS IN SETTLEMENTPROCESSFOR ECFs                77
             Causes for differences   between hospital
                and ECF settlements                          77
              Special significance  of delays in settle-
                ments with ECFs                              79
  8       CHANGESPROPOSEDBY HEW IN METHODSOF REIM-
          BURSEMENTTO PROVIDERSOF SERVICE                    81

  9       SCOPEOF REVIEW                                     84
APPENDIX                                                                 Page

       I   Letter dated September 28, 1970, from the
             Assistant Secretary,  Comptroller, Depart-
             ment of Health, Education,  and Welfare,
             to the General Accounting Office                             87

  II       Letter dated July 14, 1970, from the Blue
             Cross Association to the Social Security
             Administration                                               95

 III       Principal   officials  of the Department of
              Health, Education,    and Welfare respon-
              sible for administration    of the activi-
              ties discussed in this report                               98

                               ABBREVIATIONS

BCA        Blue Cross Association

ECF        Extended-care       facility

GAO        General Accounting             Office

HEW        Department      of Health,         Education,   and Welfare

SSA        Social   Security      Administration
COMPT-ROLLERGENERAL'S                      LENGTHY DELAYS IN SETTLING THE COSTS OF
REPORT TO THE CONGRESS                     HEALTH SERVICES FURNISHED UNDER MEDICARE
                                           Social Security Administration
                                           Department of Health,   Education, and Welfare
                                           B-164031(4)


DIGEST
------

WHY THE REVIEW WAS MADE

         Federal payments to institutions       for health services    provided to Medi-
         care patients     usually  are made through fiscal   intermediaries.     These
         intermediaries     serve under contracts   made with the Department    of Health,
         Education,     and Welfare  (HEW) and administered   by the Social Security
         Administration     (SSA).

         For fiscal  years 1967 through     1969, institutions      were paid about         $11 bil-
         lion for their   costs of furnishing    services      to Medicare patients.          About
         $10 billion  was paid to hospitals.

         Payments to institutions           are made initially      on an estimated     basis but
         are subject       to adjustments      at the end of the institutions'        Medicare re-
         porting    periods,     after  the intermediaries        have determined    the institu-
         tions'    actual    and reasonable      Medicare-related     costs,    This procedure
         culminates      in a final    settlement     between the intermediary       and the in-
         stitution     and is referred       to as the settlement      process.

         The principal   Medicare fiscal       intermediary    is the Blue Cross Associa-
         tion which has subcontracted        its functions     as intermediary  to 74 in-
         dividual   Blue Cross Plans.

         The General Accounting       Office (GAO) made a review to find out the causes
         for length*y delays in the settlement       process and to suggest ways to
         minimize   the delays.      The 13 Blue Cross Plans included   in the GAO review
         were located      in 10 States and dealt with about 3.2 percent of the 6,800
         hospitals    participating    in the Medicare program at September 30, 1970.


FINDINGS AND CONCLUSIONS

         Because of the lengthy       delays by fiscal       intermediaries      in completing
         the settlement   process,     billions     of dollars     of Medicare funds paid
         out on the basis of the       estimated     cost of services       long since incurred
         have not been afforded       an appropriate      final    accounting   or a timely    re-
         view by the intermediaries          and the Federal Government.

         At September 30, 1970, over 3 years after   the end of the reporting  pc-
         riods for the first year under Medicare,  final  settlements  for the
cost of care provided     had been made with only 68 percent of the hos-
pitals  included    in the GAO review.      Furthermore,     at that date, over
2 years after    the end of the reporting       periods  for the second year
under Medicare,     final settlements    for the cost of care provided      had
been made with only 38 percent        of the hospitals     included  in the GAO
review.

There were delays in every step of the settlement             process,  from the
preparation     of cost reports     by hospitals,    through the audit of cost
reports    by intermediaries,     to the final    settlement   or agreement with
hospitals    concerning     their actual  and reasonable     Medicare costs to
be reimbursed     under the program.

Intermediaries      and hospitals   attributed     some of the delays      to SSA's
administration      of the program.

   --There     have been problems with certain        SSA-generated      financial
      and statistical       data (reimbursement    report)    intended     to assist
      hospitals     in preparing    their  Medicare cost reports        and to guide
      intermediaries      in making audits     and final   settlements.        (See
      pp. 15 to 18.)

   --Some intermediaries     delayed making final     settlements     with hospitals
      because a method of apportioning      hospital    costs between Medicare
      and non-Medicare   patients   which was authorized      by HEW resulted     in
      Medicare payments that included     certain    private   room costs,    which
      were not covered under the program, and certain          delivery    room costs,
      which were not applicable     to Medicare patients.

     On the basis of an analysis    of a sample of cost reports        for hos-
     pitals  in 32 States and Puerto Rico, GAO believes         that the elimi-
     nation of this questionable    apportionment!method      (combination
     method) would reduce Medicare payments to hospitals           by between
     $100 million  and $200 million   annually.      (See pp. 19 to 32.)

Reasons     for delays in the various    steps    in the settlement      process     are
outlined      in the following sections.

Deluys     fn submission   o$ cost   reports

For the first     year's     reporting     periods,     only 7 percent   of the hospitals
submitted   their    reports     within    90 days after     the end of their   reporting
periods,   as prescribed        by SSA. On the average most of the remaining
hospitals   were about 4 months late.               GAO did not note any improvement
in the submission       of second-year        cost reports     but did note some improve-
ment in the submission          of third-year       cost reports.     GAO noted that cost
reports   had been submitted          late because of

  --inadequacies      in hospital accounting  systems and insufficient              numbers
     of hospital     employees capable of preparing   the reports    (see          pp. 42
      to 44)and
  --delays    by public accounting    firms employed by the hospitals    in
     completing   their audits   before submission   of the cost reports
     (see PP. 44 t0 46).

DeZaus in initial      revia3s

Many intermediaries  did not complete            their   initial         reviews   for   periods
of from 1 to 3 months because

  --the cost reports      were incorrect    or incomplete               and either     were
      returned  to the hospitals     or were held by the                intermediaries
      pending the receipt     of additional   information               (see p. 52) or

  --the    intermediaries        did not have sufficient        staff      to make the re-
      views, particularly          at times of peak work      loads       (see pp. 531.

Delays   in making field        audits

For the first    3 years under the Medicare program,    intermediaries     sched-
uled for field    audits virtually all the cost reports      of the hospitals
included   in the GAO review.

  --For some intermediaries      that made field    audits with their   own staffs,
     delays in starting    the audits were caused by an uneven audit work
     load because many hospitals      serviced   by an intermediary   had the same
     reporting  periods.     (See pp. 61.)

  --For some intermediaries     that subcontracted     the audit function,     de-
     lays of from 3 to 6 months in starting        the audits  occurred    because
     of difficulties  in obtaining   SSA approval     of the audit subcontracts.
     (See pp. 62 to 64.)

Delays   in making    final      settlements

After    the field  audits were completed,   final settlements    were delayed
further     because of disagreements  between the intermediaries       and the
hospitals     as to the proper amounts of Medicare-related      costs.

GAO believes     that there is a need for more direct    involvement    of the
prime contractor      (Blue Cross Association) in bringing     about final
settlements    in those cases in which audits    have been completed       for some
time.     (See pp. 75 and 76.)

There have been similar     delays in making settlements       with extended-
care facilities.     These delays are especially     significant    because of
the large number of extended-care     facilities   that have left      the Medi-
care program without    having made settlements    with intermediaries.
(See. pp. 77 to 80.)

Unless improvements          in the several    steps of the settlement      process           are
made, the Medicare          payments --amounting    to billions  of dollars--that                  have



                                         3
        j-Lot   ~J~~~~ri afforded     an appropriate   final accounting   can be expected to in-
        c:r -2a s E and reports        to HEW and congressional    bodies on Medicare reimburse-
        iF-?nts to institutions           will   not be based on the most current   and accu-
        rate data.




        The Secretary     of HEW should provide for SSA to take certain      actions    aimed
        at alleviating     the unsatisfactory  conditions   revealed during the GAO
        review.      (See pp. 32, 48, 56, and 75).     GAO's recommendations    include
        having SSA:

            --Establish       a definite     timetable    for 'the development     of effective,
               useful3    and timely      reimbursement      reports  for use by hospitals       and
               intermediaries        in the settlement       process or consider     other alter-
               natives,     such as authorizing        intermediaries     to 'prepare the reports.
               (See p, 32.)

            --Discontinue           or modify the use of the combination   method of apportion-
               ing hospital          costs between Medicare and non-Medicare    patients.   (See
               p. 32.)

            --Encourage     hospitals     to adopt different     cost-reporting      periods to pro-
               vide a more even distribution          of intermediaries'        work loads and to
               facilitate     the preparation     and/or audit of cost reports          by the hos-
               pitals'    accounting   firms.     (See p* 48.)

            --Require    the Blue Cross Association     to take a more active       role in the
               final  settlement   process by directly     assisting     those local Blue Cross
               Flans that have the most serious       backlogs     of audited cost reports
               for which settlements     have not been made.         (See p. 75.)


AGENCY ACI"IJlfS
         ----.__ /'LTV UIW'SOLPTD ISSUES
       HEW agreed,    in part, with some of GAO's recommendations          and did not agree
       with others o Of particular      significance     is HEW's decision    to discontinue
       the use of the combination     method of apportioning      hospital    costs to the
       Medicare   program for larger institutions        (e.g., having 100 or more beds).
       HEW estimates    that this action will      reduce Medicare costs by $100 million
       in fiscal   year 1972.

       HEW's decision   to discontinue  the use of the combination          method will    re-
       quire changes in the Code of Federal Regulations          pertaining     to Medi-
       care.  GAO believes    that HEW should consider     certain     other factors     be-
       fore such changes in regulations     are finalized.       (See pp. 34 to 37.)

       SSA intends   to try to solve            its problems in producing      reliable    and
       timely  reimbursement  reports             for use in the settlement     process    rather
      than to consider   alternatives as recommended by GAO. GAO noted,
      however, that some of the specific     actions cited by HEW to solve
      the problems had been attempted    previously  by SSA without solving
      the problems.    (See pp. 33 and 34.)

      To facilitate--through           a more even distribution       of work loads over
      the year--both         the preparation     of cost reports     by the hospitals'
      accounting       firms and the processing        and auditing    of cost reports      by
      the intermediaries,           SSA is considering     a change in its instructions        to
      require     that Medicare       cost reports    cover the same reporting       periods
      and have the same due dates as the hospitals'                 annual reports     to the
      Internal      Revenue Service.        GAO believes    that the SSA-proposed change
      has merit,       particularly     where it can be adapted to expedite          the overall
      settlement       process.      (See pp. 49 and 50.)

      HEW believes  that the Blue Cross Association's                 role in the Medicare
      program is essentially   an administrative    rather              than an operating
      one and that it does not have sufficient      staff             to become directly   in-
      volved in individual   hospital  cost settlements.

      GAO believes,       however, that the role of the Blue Cross Association
      under its contract         with HEW should be to require          performance    from its
      subcontractors        (the local Blue Cross Plans) or to take such steps as
      may be necessary         to fulfill       its contractual obligations.        Such steps
      could include       assisting       certain   Plans in making settlements       with in-
      dividual     hospitals,      particularly      where such settlements      at a particular
      Plan had been consistentiy              delayed for unduly long periods of time
      after    audit.     (See pp. 75 and 76.)


MATTERS FOR COXSIDERATION BY TiW CONGRESS

      During 1970 the cognizant       legislative         committees   of the Congress con-
      sidered   HEW's proposal    that institutions          providing   services  tc Medi-
      care patients    be paid on a prospective            basis rather   than on a retro-
      spective,   reasonable-cost     basis.

      The cormnittees     concluded    that reimbursement        on the basis of prospec-
      tive rates should be authorized          on an experimental         basis only.          The
      conunittees   pointed    out in their    reports    that a solid foundation              of
      experience    was required     for all possible       alternative      forms of reim-
      bursement before permanent changes were made, Although                      legislation
      authorizing     the use of prospective       rates on an experimental              basis
      was not enacted by the Ninety-first            Congress9 similar         legislation        was
      introduced    in January 1971 in the Ninety-second               Congress.

       This report   is being sent to the Congress because of its                   interest      in
       the problems which have occurred       in the Medicare program               relating      to
       the reimbursement    of costs incurred    by the participating               institutions,
                              CHAPTER1

                  FEATURESOF MEDICAREPROGRAM

                 PERTINENT TO SETTLEMENTPROCESS

       The Medicare program was established   by the Social Se-
curity   Amendments of 1965 (42 U.S,C, 1395-1395 11).     This
program, which became effective    on July 1, 1966, is admin-
istered by the Social Security Administration,Department       of
Health, Education,    and Welfare and provides two basic forms
of protection   against the costs of health care for eligible
persons aged 65 and over.

       One form, designated as Hospital          Insurance Benefits
for the Aged (part A), which is the principal             subject of
this report,    covers inpatient     hospital     services and post-
hospital   care in extended-care      facilities      (ECFS) and in the
patients'    homes, Part A is financed primarily           by special
social security    taxes collected     from employees, employers,
and self-employed     persons.     These taxes are deposited in
the Federal hospital      insurance trust fund.

       The second form of protection,      designated as Supple-
mentary Medical Insurance Benefits        for the Aged (part B>,
is a voluntary      program and covers physicians'    services and
a number of other medical and health benefits,          including
hospital   outpatient     services and certain home care.       Part B
is financed,     in part, from premiums collected     from each el-
igible   beneficiary     who has elected to be covered by the pro-
gram. The premiums, which are deposited in the Federal
supplementary medical insurance trust fund, are matched by
equal amounts appropriated        from the general revenues of the
Federal Government.

       As of June 30, 1969, over 20 million       people had part A
coverage.      From July 1, 1966, through June 30, 1969, part A
benefit    payments, which are subject to the settlement        pro-
cess discussed in this report,        amounted to almost $11 bil-
lion.    Additional     costs of about $283 million    were incurred
in administering      part A. The benefit     payments and related
administrative      costs paid under Medicare are summarized in
the following     table.
                                        Fiscal year
                                   1967     1968    1969            Total

                                            (000,000    omitted)
Benefit payments:
   Hospitals                      $2,394    $3,389     $4,221      $10,004
   ECFs                               102       317        390          809
   Home health agencies                12        30         43           85

         Total                     2,508     3,736      4,654       10,898

Administrative     costs               74    --   97      112          283

         Total                    $2,582    $3,833     $4,766      $11,181

       During the same 3-year period, part B benefits    of about
$155 million,   which are also subject to the settlement    pro-
cess, were paid to providers   for certain  outpatient   hospital
services and for home care.

USE OF INTEIWEDIAXIES TO ADMINISTER PART A

     Section 1816(a) of the Social Security Act authorized
the Secretary of HEX to enter into agreements with public
and private   organizations    and agencies which had been nomi-
nated by the providers      to act as fiscal  intermediaries in
the administration     of benefits  under part A,

       Among other things these fiscal        intermediaries      are re-
sponsible    for (1) making payments at least monthly on an
estimated basis to providers        for covered services       furnished
to Medicare beneficiaries,       (2) furnishing     consultative      ser-
vices to assist providers      in developing      accounting     and cost-
finding   procedures which will ensure that providers             receive
equitable    payment under the program, (3) communicating to
providers    any information   or instructions      furnished     by the
Secretary of HEW and serving as a channel of communication
from providers     to the Secretary,    (4) making such audits of
the records of the providers        as may be necessary,       and (5)
making final annual determinations,         on the basis of such
audits,   of the amounts of payments TV be made.
      The intermediaries'  costs for performing      these func-
tions under their contracts with the Secretary--which
amounted to about $164 million   for fiscal     years 1967 through
1969--are reimbursed from the hospital      insurance trust fund.




                                x
SELECTION OF BLUE CROSSASSOCIATION
As .AN IrnERMFJDIARY

      In November 1965 the American Hospital     Association
nominated the Blue Cross Association     (BCA) to serve as an
intermediary,   and in January 1966 the Secretary of HEW an-
nomced the selection     of BCA for this role.     In June 1966
SSA, under a delegation    of authority  from the Secretary,
entered into a contract    with BCA which, in turn, entered
into subcontracts   with 74 individual   Blue Cross Plans for
the performance of most of the intermediary      functions   set
forth in BCADs agreement with SSA.

        In September 1970 BCA was acting as intermediary        for
(1) about 90 percent of the 6,800 hospitals         and (2) about
60 percent of the 6,900 ECFs and home health agencies par-
ticipating    in the Medicare program at that time.        The re-
maining participating     institutions  deal either directly
with SSA or with nine other private      organizations     serving
as intermediaries,

        Cur review was made at the SSA Central Office in Balti-
more, Maryland; at the Blue Cross Association         in Chicago,
Illinois;    and at 13 Blue Cross Plans.    These Plans, located
in 10 States, were responsible     for making about 35 percent
of the benefit     payments made during fiscal    years 1967
through 1969. These 13 Plans were also responsible            for
making about 2,245 first-year     (1967) hospital     settlements
and about 2,325 second-year and third-year        (1968 and 1969)
hospital    settlements.

METHODOF PAYMENTTO PROVIDERSOF SERVICE

        According to section 1814(b) of the Social Security
Act, payments to providers          of service are to be made for the
reasonable cost of services furnished             to Medicare benefi-
ciaries     as determined under section 1861(v) of the same law.
Section 1861(v) authorizes          the Secretary of HEW to prescribe
regulations      establishing    the method or methods to be used in
determining      reasonable costs and states that s,uch regulations
should provide for making suitable            retroactive    corrective
adjustments      where, for a provider      of services    for any ac-
covnting period,        the aggregate reimbursement proves to be
either    inadequate or excessive.

                                   9
       In implementing these requirements,       SSA issued regula-
tions entitled    "Principles    of Reimb,ursement for Provider
costs 0us which established    the guidelines    and procedures to
'5e used by providers     of service and fiscal    intermediaries
 En determining   reasonable cost.      It was intended by SSA that
these reimbursement principles       would result    in giving recog-
nition   to all necessary and proper costs incurred by provid-
ers in furnishing     services to Medicare patients      and would
avoid the inclusion      of the costs of providing     care to non-
Medicare patients.

      Providers   of service are paid on an estimated basis
during the year,       These interim estimated payments are in-
tended to approximate,      as nearly as possible, actual costs
in order to minimize the aniounts of adjustments     at the time
of final   settlement.

       To facilitate   making final settlements,    providers are
req+red    by SSA instructions    to submit to intermediaries    an-
nual Medicare cost reports covering a U-month period of op-
erations.      During the first  year of the programp a provider
had the option of submitting      a report covering the period
July l9 1966, to the end of its accounting        year if such re-
port covered at least 6 months.

       A provider    may select any 12-month period for Medicare
cost-reporting      purposes regardless   of the reporting     year it
otherwise uses.       According to SSA instructions,     cost reports
are required to      be submitted to the intermediary      within 90
days after the      end of the provider's   reporting   period.1
Preparation   of Medicare     cost reports

      The principal document used in the settlement  process
is the Medicare cost report,   This report was developed by


aIn August 1970 SSA extended the due dates for the submission
 of cost reports     to 120 days after the close of the hospi-
 tals" reporting     periods for those hospitals    that elected to
 submit Medicare     cost reports which had been certified      as
 accurate by the     hospitals'  independent auditors.


                                    10
SSA in consultation    with provider   and intermediary     groups
and was designed to show what portion       of a provider's     total
allowable  costs was applicable     to covered services provided
to Medicare beneficiaries,

      Although the SSA principles        of reimbursement offer a
provider   several alternatives      in arriving   at the amount to
be reimbursed,    the preparation      of a cost report essentially
consists   of the following     four steps.

1, Betermination       of allowable    costs

         Under the SSA principles        of reimbursement,      direct
   and indirect      costs which are reasonable and necessary
   for providing      patient    care are allowable.     Certain spe-
   cific   costs, however, are unallowable         and must be ex-
   cluded for reimbursement purposes.            These unallowable
   costs include (a> amounts attributable            to physicians'
   care to individual        patients,  which,are reimbursable       under
   part B, (b) bad debts applicable          to non-Medicare patients,
    Cc> fund-raising      expenses, (d) costs of activities         unre-
   lated to patient       care, such as cafeterias      and gift shops,
   and (e> costs of personal convenience items, such as
   telephone,     radio, and television      services.

2, Allocation   of allowable    costs
   to revenue-producing     activities

           After a provider    has determined its total allowable
   costs for Medicare reimbursement purposes9 the second
   step is to allocate      these costs to those activities         or
   services for which the hospital         makes charges,      This pro-
   cess p which iS commonly referred        to as cost finding,      in-
   volves the allocation       of the costs of non-revenue-
   producing activities       or departments (such as administra-
   tion, laundry,     and housekeeping)     to revenue-producing
   activities    or departments (such as operating         rooms, phar-
   macies, laboratories,       and routine    daily services).

3, Apportionment of allowable          costs between
   Medicare and non-Medicare          patients

            After the provider     has allocated     its allowable costs
   to its      revenue-producing    activities,    the third step is to

                                      11
   apportion  these costs to the Medicare program on the ba-
   sis of charges applicable    to Medicare patients.    For ex-
   ample, if 40 percent of the charges of a hospital's      X-ray
   department were applicable     to X-ray services provided to
   Medicare beneficiaries,    40 percent of the allowable costs
   allocated  to the X-ray department would be apportioned      to
   the Medicare program for reimbursement purposes.

         Although the SSA principles      of reimbursement offer
   a nzlTnber of alternatives    in making such apportionments,
   the use of charges as the basis for apportioning        costs
   represents   a principal   feature of the reimbursement
   method ,under the Medicare program,

4. Consideration  of amounts paid by the
   beneficiaries  and interim payments
   made by the intermediary

           After the provider has apportioned      its allowable
    costs to the Medicare program, it must consider the de-
    ductible    and coinsurance    amounts payable by the Medicare
   patients1     and the interim payments due from the inter-
   mediary for the services provided to Medicare patients
   during the provider's       reporting  period.    The difference
   between the allowable       costs and the sum of payments re-
   ceived or due from the patients        and the intermediary      rep-
   resents the amount of the final adjustment due to or from
   the program.


1As of January 1, 1971, the amounts payable by the Medicare
 beneficiary     for inpatient     hospital services were $60 for
 the first     60 days of hospitalization,      $15 a day for the 61st
 day to the 90th day of hospitalization,          and $30 a day for
 the 91st day to the 150th day of hospitalization           in the
 event that the beneficiary         elected to use his 60-day life-
 time reserve of hospital         benefits.   In addition, the bene-
 ficiary    is responsible     for the cost of the first   three
 pints of blood.       As of January 1, 1971, the amounts payable
 by the beneficiary      for services provided in an extended-
 care facility      were $7.50 a day for the Zlst day through the
 100th day.


                                  12
Steps in settlement process
      Although actual procedures followed by Blue Cross Plans
varied during the first   three reporting    periods -under Medi-
care, the process of making final settlements       with providers
dealing with BCA usually    consisted  of the following   four
steps s

1. Submission    of cost reports

            SSA instructions    require that, within 90 days1 after
    the end of a providerDs        reporting    period, a completed
    cost report be filed with the intermediary.             These in-
    structions     also authorize     intermediaries    to grant time
    extensions     if providers    are unable to complete and submit
    their cost reports within the go-day period.

2. Desk audits    and tentative        settlements

           Upon receipt    of the cost report,       the intermediary
    is responsible     for making a '"desk audit" to check the
    completeness of the cost report and to identify             any ob-
    vious errors or ine0nsistencies.            On the basis of the
    des'k audit, the intermediary       may then make an initial
    retroactive    adjustment,     or tentative     settlement,   with the
    provider.     SSA regulations     pr0vide that, for the purpose
    of making tentative      settlements,      costs be accepted as
    reported by the provider unless Obvious errors and incon-
    sistencies   are noted.

3. Performance     of field   audits

          A131 cost 'reports are subject to field   audits which
    consist of an onsite examination     by the intermediary       of
    the provider's    accounting records and related    statistical


1
 In August 1970      SSA extended the due dates for the submission
 of cost reports      to 120 days after the close of the hospi-
 tals'   reporting    periods for those hospitals    that elected to
 submit Medicare      cost reports which had been certified      as
 accurate by the      hospitals'  independent auditors.


                                       13
    data.   For the first three reporting     periods under the
    Medicare program (providers'   reporting     periods ended on
    or before June 30, 1967, 1968, and 19691, such field
    audits were scheduled for virtually      all cost reports.

           Although field audits sometimes were undertaken by
    the intermediaries'     staffs,     the audits usually were made
    by public accounting     firms under subcontracts       with the
    intermediaries.      Under the terms of the standard subcon-
    tract prescribed     by SSA, the public accounting        firm
    agreed to complete its audit of the provider's            cost re-
    port s  make  any necessary     adjustments,   and render    an
    opinion as to the accuracy of the report within 90 days
    after the intermediary      had forwarded the cost report to
    the firm unless the intermediary         agreed that it was nec-
    essary to extend this time limit.

4. Final    settlements

          After the field audit has been completed and audit
    adjustments have been agreed to by the providers,     the
    Blue Cross Plan can make a final settlement    with the
    provider.   Blue Cross Plans operate under subcontracts
    with BCA, and their determinations   of the reasonable
    costs to be reimbursed are subject to review and concur-
    rence by BCA.
      Although the 13 Blue Cross Plans included in our re-
view have lagged behind the nation as a whole, delays in
making settlements      have been a nationwide problem.           At Sep-
tember 30, 1970, there were 6,820 hospitals           for which first-
year final settlements      were required and 7,049 hospitals             for
which second-year settlements        were required,     including      those
no longer participating       in the program.     SSA statistics
showed that at that date about 79 percent of the hospitals
had made final    settlements    for their first    reporting      periods
and that about 55 percent had made final settlements               for
their second reporting      periods.    There were also significant
delays in making final settlements        with about 5,000 ECFs for
which settlements     were required.




                                     14
                                CHAPTER2

     BELAYS IN SETTLEMENTSWITH HOSPITALS ATTRIBUTED TO

                  SSA'S ADMINISTRATION OF PROGRAM

       Intermediaries,      their audit subcontractors,        and hospi-
tals advised us that delays in the various steps of the
settlement     process had been caused, in part, by difficulties
arising    from SSA's administration          of the Medicare program.
The problem areas which were cited most frequently               involved
(1) the untimeliness        and unreliability       of certain  SSA-
generated financial        and statistical      data which were in-
tended to be used in the preparation             and audit of cost re-
ports and (2) the combination           method of apportioning      hospi-
tal costs between Medicare and non-Medicare patients,                 as
provided in SSA's reimbursement principles,              which the in-
termediaries      considered questionable        because its use re-
sulted in Medicare payments that included certain               private
room costs, which were not covered under the program, and
certain    delivery    room costs, which were not applicable           to
Medicare patients.

DIFFICULTIES WITH SSA-GENERATED
FINANCIAL AND STATISTICAL DATA
      Under SSA's contracts       with its intermediaries,       SSA as-
sumed the responsibility       for (1) maintaining      a master record
of eligibility    and claims history       of Medicare beneficiaries
and (2) furnishing     pertinent     information   to intermediaries
and hospitals.     SSA also agreed to furnish        intermediaries
with information    related    to accepted or rejected      claims.

       As a by-product       of its central       data processing    func-
tions, SSA developed for use by intermediaries                and hospi-
tals a Monthly Provider Statistical              and Reimbursement Re-
port (reimbursement        report) which represented         an accumula-
tion of certain      statistical        and financial   data developed
from hospital    bills     processed by SSA. The reimbursement
reports which were to be furnished              to hospitals    by the in-
termediaries    were to include,          for all Medicare patients        who
had been treated in each hospital,              such information     as ad-
missionanddischarge          statistics,      hospital  charges forcovered


                                      15
services furnished, deductible  and coinsurance              amounts,    and
interim payments made by the intermediary.
       Among the purposes of the reimbursement reports were
(1) assisting      hospitals     in preparing cost reports and
(2) guiding intermediaries            in making audits and final settle-
ments.     According to SSA, timely and reliable              reimbursement
reports would facilitate           the settlement    processg particu-
larly by providing       hospitals      and intermediaries       with infor-
mation on hospital        charges and patient-days         for Medicare
patients    which could be used by them to check the accuracy
of similar     data developed by the hospitals,             The Medicare
charge and patient-day         data are used by hospitals           in appor-
tioning    allowable costs between Medicare and non-Medicare
patients    and therefore      represent key information          in the
preparation     and audit of cost reports.

      SSA's problems in producing accurate and timely reim-
bursement reports were cited by hospitals     and their accoun-
tants as causes for delays in the preparation      of cost re-
ports and by intermediaries    and their audit subcontractors
as causes for delays in making audits and final settlements.
As a result,    at least seven of the 13 intermediaries     in-
cluded in our review found it necessary to accumulate simi-
lar statistical    data to make settlements  with hospitals,

        In April 1970 officials       at one intermediary     that ser-
viced about 320 hospitals         during the first    reporting     period
and about 350 hospitals       during the second and third report-
ing periods advised us that, because the SSA reimbursement
reports were not useful,        they had not opened the boxes con-
ta"..ning the reports furnished        by SSA. Officials      at another
intermediary     that serviced about 230 hospitals         during the
first    three reporting   periods advised us that the SSA re-
imbursement reports were inaccurate          and unreliable     and that,
although they had retained         the most recent reports,       they
had not used them.

Problems in developing       timely and
reliable reimbursement       reports

      During the 3-year period ended March 1970, SSA made
several changes to the content and format of its reimburse-
ment reports to make them more useful in the settlement

                                    16
process.      The most important      revision,    made in March 1969,
involved the development of a supplemental,               detailed   print-
out of bills      to support the summary data shown on the re-
port.      SSA anticipated     that this detailed      printout    would
facilitate     the hospitals'      and intermediaries'       task of rec-
onciling     Medicare charges as reported by the hospitals              and
by SSA. In March 1970, however, SSA officials                 advised us
that the following        problems with the reimbursement reports
continued     to exist.

      --SSA had a backlog       of about 117,000 adjustment actions
         to correct claims      data previously  included in the re-
         ports,

      --SSA had not completed a project     to establish     controls
         which would ensure resubmission    of bills   returned to
         the intermediary   for correction,   Without such con-
         trols SSA had no assurance that the amounts shown on
         the reimbursement reports included all bills        sub-
         mitted by a hospital   for a given accounting     period,

      --Although   SSA issued corrective    instructions     to inter-
         mediaries and hospitals   in March 1969, some bills
         submitted at the end of the hospitals'        accounting
         periods included charges for two cost-reporting          pe-
         riods,   The charges shown on these bills,        commonly
         referred  to as straddle  bills,   had to be prorated by
         SSA between the two cost-reporting       periods,
       In commenting on these problems, FEW pointed out to us
in a letter    dated September 28, 1970 (see app. I), that much
of the difficulty      was attributable    to delays by the hospi-
tals and intermediaries       in processing    bills,    HEW stated
that a period of about 60 days elapsed from the date that
patients    were discharged from the hospitals         until the date
that SSA received the bills.          We agree that delays in re-
ceiving hospital      bills have contributed       to SSA's problems
in developing     timely and reliable     reimbursement reports,
We noted, however, that, even after the bills            were received,
it took SSA--on the average-- about 30 days to process them.




                                      17
intermediaries  develop their
own reimbursement reports

       Although in August 1967 SSA advised its intermediaries
not to establish       and maintain records that would duplicate
the SSA reimbursement reports,         at least seven of the 13 in-
termediaries     included in our review had accumulated data
similar    to that contained in the SSA reimbursement reports
to facilitate      the settlement   process,    Intermediary person-
nel informed us that their decisions          to do this had been
based on the assumption that they could produce more timely
information    similar    to that included in the SSA reimburse-
ment reports.

       For example, at March 31, 1970, one intermediary           which
serviced 22 hospitals     had made final settlements        with all
the hospitals    for the first,  second, and third reporting
periods.    This intermediary   had assisted the hospitals         'in
preparing   cost reports by furnishing     certain    statistical
and reimbursement information     developed from its own records
after it had compared its records with the SSA reimburse-
ment reports and had found material      differences.

      For 20 hospitals     we compared data shown on the SSA re-
imbursement reports which were dated 75 days after the close
of the hospitals'    first   reporting    periods with similar      in-
formation maintained by the intermediary          and noted that the
number of inpatient-days      for Medicare patients        and the
amounts of interim payments apparently          had been understated
by as much as 10 percent on the SSA reimbursement reports.
In later SSA reimbursement reports dated about 5 months af-
ter the end of the hospitals'        reporting   periods,    however,
the amounts of these differences        were significantly      reduced.

       Because the statistical       and payment data applicable     to
a specific   hospital's    reporting    period have been continually
updated and corrected      by SSA, it appears that reimbursement
reports can be used by SSA for such purposes as developing
program statistics      and making comparisons between hospitals;
however, the reports have not proved to be an effective            and
useful tool for hospitals       and intermediaries   in the settle-
ment process because of the problems in producing reliable
data on a timely basis.


                                   18
ELIMINATION OF QUESTIONABLEMETHOD
OF APPORTIONINGHOSPITAL COSTS
WOULDREDUCEMEDICAREPAYMENTSBY
MORETHAN $100 MILLION ANNUALLY
       A significant      reason for delays in final settlements
given by certain       intermediaries    involved the use of the com-
bination    method of apportioning       allowable    costs between
Medicare and non-Medicare patients           because under this method
private room costs, which were not covered under the Medi-
care program, and delivery          room costs, which were not appli-
cable to Medicare beneficiaries,          were included in the amount
of costs apportioned         to Medicare patients.      We believe that
elimination      of the use of the combination method would re-
duce Medicare payments to hospitals            by between $100 million
and $200 million       annually.

        Because reimbursement instructions were lacking in the
initial    stages of the program, SSA in September 1967 advised
its intermediaries     that:

      "Where the intermediary     exercises judgment and
      applies generally    accepted accounting principles
      in areas where there is an absence of detailed
      implementing instructions     or interpretations   of
      the Principles,   its decision will be acceptable
      and will be supported by the Social Security Ad-
      ministration,"

        Some intermediaries      were reluctant      to follow this ad-
vice.      Three intermediaries,      in particular,      advised us in
1968 that they were not making final settlements                 or were
making conditional       final settlements       pending an official
clarification       by SSA regarding    their questions concerning
the higher payments to hospitals           that resulted      from the use
of the combination method of apportioning              allowable    costs.
One intermediary,       which serviced about 160 hospitals           during
the first      three reporting    periods,    did not make any final
settlements       until March 1970.




                                     19
      AM__
         _-L- --
 iI
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1
j!i


          Authorized     methods of
          apportioning     allowable        costs

                The reimbursement        principles       initially      authorized      sev-
         eral methods for use by hospitals                in apportioning         allowable
         costs between Medicare          patients      and other patients.            The
         three principal        methods were designated             as the departmental
         method, the combination          method with cost finding,               and the
         combination      method with estimated          percentages.         These appor-
         tionment    methods were developed            to provide      means for compli-
         ance with the statutory          requirement         that the costs of ser-
         vices provided       to Medicare      patients       not be borne by non-
         Medicare    patients      and that the costs of services               provided     to
         non-Medicare      patients    not be borne by the Medicare                program.

                Departmental       method

                 Under the departmental          method the charges to Medicare
         patients     for services      provided     in each revenue-producing         de-
         partment     or activity      are established        as a percentage    of to-
         tal charges       to all patients       receiving      the services   of each
         department.         The percentage      for each revenue-producing         de-
         partment     then is applied       to the costs of that department            to
         determine      the costs of services          rendered    to Medicare   pa-
         tients.

                Under this method the hospital             is required     to allocate
         allowable    costs --referred         to as cost finding--to        routine
         services    (such as room, board,          and nursing     services)      and to
         each of the various         ancillary     departments     (such as X-ray,
         operating    room, and pharmacy).           We believe     that the depart-
         mental method is the most precise              of the three apportionment
         methods.

                Combination      method     with    cost   finding

                The amount of allowable          costs apportioned          under the
         combination        method with cost finding         is computed in two
         steps.      First,     the costs for routine        services     are divided    by
         total   inpatient-days          for ah1 inpatients       to arrive     at an av-
         erage per diem rate per inpatient.                 This rate is multiplied
         by the total        number of inpatient-days          for Medicare      inpa-
         tients    to determine        the amount to be reimbursed           for the
         costs of routine          services.
       The second step involves   establishing       a percentage re-
lationship   between total inpatient     charges and total Medi-
care inpatient    charges for all ancillary       services.     The
Medicare reimbursement for ancillary        services then is de-
termined by applying this composite percentage to the total
sosts of ancillary     or special services.       (See table on
p. 220)

      Combination   method with    estimated   percentages

       The amount of allowable    costs apportioned     to Medicare
patients   under this method is computed in generally           the
same manner as that of the combination method with cost
finding,   except that the allocation       of costs between total
ancillary   services and routine    services is based on percent-
ages obtained from the intermediary         (for example, 40 percent
of the costs is estimated to be applicable          to ancillary    ser-
vices and 60 percent is estimated to be applicable            to rou-
tine services).     In our opinion,    this,is   the least precise
of the three apportionment     methods.

      For reporting  periods ended during calendar years 1966
and 1967, the use of this method was optional    on the part of
a hospital.    For reporting periods ended during calendar
year 1968, this method could be used when the intermediary
determined that a hospital   could not apply the cost-finding
procedures.    For reporting periods ended after December 31,
1968, this method was no longer authorized.




                                  21
       Intermediary    questions
       regarding    combination method

              Some intermediaries    questioned the use of the combina-
      tion method because under this method the amount of Medicare
      reimbursements was generally        higher than the amount under
      the departmental      method for two reasons that were considered
      by the intermediaries       to be inconsistent    with the Medicare
      law, First,      certain hospitals     with a preponderance of pri-
      vate rooms received increased Medicare reimbursements under
      the combination method because the average cost per day for
      routine services apportioned       to the Medicare program in-
      cluded the higher costs of private         rooms. The costs of
      private    accommodations were not covered under the Medicare
      program unless such accommodations were determined to be
      medically    necessary.
/.           Second, under the combination method the inclusion             of
..
      delivery     room costs in total ancillary     costs also resulted
nI,    in higher reimbursements     to hospital    because (1) such ser-
      vices were not furnished      to Medicare patients     and (2) the
      ratio of costs to charges for delivery         rooms, which generally
      are operated at a loss, was usually substantially            different
      from the ratios of costs to charges for other ancillary               ser-
      vice departments,      which generally    are operated at a profit.
      This variance in ratios had the effect of distorting              the
      composite ratio used in the combination method.             The effect
      of using the combination method to apportion          ancillary
      costs) compared with the more precise departmental             method,
      is illustrated     in a hypothetical    case shown in the following
      table.
                                                                                              Allowable
                                                      Percent    of                    costs      apportioned
                                                       Medicare                      to Medicare          program
           At-cillary          Charges   Charges to      charges          Total             (col.     3x41
             service           to all     Medicare     to total       allowable   Combination         Departmental
           department         patients    patients       charges          costs     method                 method

                                  (1)         (2)          (3)            (4)           (5)                 (6)
      Operating       room    $100,000    $ 25,000         25         $ 80,000     $      -             $ 20,000
      Delivery      room        35,000                                  70,000
      X-ray                    100,000      355000         ;5           60,000                            21,000
      Laboratories             200,000      70,000         35          120,000                            42,000
      Medical      supplies
         sold                  100,000      30,000          30          80 ,000                           24,000
      Drugs sold               150,000    -60,000          -40         100,000      ---L.--               40,000
            Total             $685,000   $220,000
                                          --               2          $~10,000     $163,200             $147,000




                                                          22
        We noted that, as early as January 1967, one interme-
diary included in our review, which serviced about 160 hos-
pitals,    had contacted BCA regarding     the propriety  of using
the combination method for computing costs apportioned          to
Medicare,      In later correspondence    with BCA, the interme-
diary included an example which showed that a hospital,          by
using the combination method rather than the departmental
method, would receive additional       reimbursements of about
$528,000 annually,

     The intermediary     concluded        that:

     @'Because there is an apparent loophole in the
     Medicare method of reimbursement,    this matter is
     being called to your attention    for whatever ac-
     tion you might wish to take."

      In March 1968 another intermediary     included in our re-
view o which serviced 23 hospitals,    requested a decision from
BCA regarding   the inclusion   of such non-Medicare-related
costs as delivery    rooms,   The BCA reply dated March 27,
1968, included the following     comments.

     @'*-k-kI recommend that you proceed to finalize          not
     only your 1966 cost reports but also your 1967
     cost reports without exclusion         of these costs,
     As a general operating     principle,     we should not
     deduct cost from a provider's         cost report which
     the existing    rules and regulations       allow.    As the
     Medicare Program is refined and changes are intro-
     duced, they will be made on a prospective           basis
     so that the providers     and Intermediaries       will be
     able to institute     the changes on an equitable         ba-
     sis and with the minimum of friction."

Comments of HEWGeneral Counsel
and HEW Audit Agency on use of
combination method
------
       In November 1967 the HEWAssistant      General Counsel for
Health Insurance issued a memorandum to an SSA official
concerning   the intermediaries'  questions    relating   to the
inclusion   of private  room costs and delivery      room costs in
the Medicare reimbursement formula,       This memorandum

                                      23
referred   to Medicare   reimbursement   regulation   which stated
that:

      "(b) *** The reasonable cost of private         room ac-
      commodations is covered in full only where their
      use is medically     indicated,     ordinarily only when
      a patient's   condition     requires him to be isolated.
      Where private   accommodations are furnished       for a
      patient's   comfort, the amount payable under this
      Subpart A may not exceed the reasonable cost of
      accommodations containing        from two to four beds.
      Ml'

        Although the regulation  recognized that a difference
existed in the costs of different      types of accommodations,
the regulation    did not provide specific   guidelines  on how
this difference    was to be determined and shown in the cost
report.

       The Assistant   General Counsel's memorandum stated that
delivery    room costs should be excluded in determining    costs
apportioned    to Medicare.   The memorandum provided,   in part,
that:

     "We believe that the inclusion    of delivery   room
     costs in the reimbursement formula is clearly       in
     error for the reason that such costs are in no
     way related to the cost of services furnished      to
     beneficiaries,  and hence cannot, under the pro-
     vider cost reimbursement regulations     be charged
     or apportioned  to the Title XVIII program.

     I'*** In the context of a program limited     to bene-
     ficiaries    who are over age 65, the costs of de-
     livery    room services are not allowable   costs and
     hence may not be charged to the program regard-
     less of which method of apportionment     is chosen
     by the provider.
     "Under the departmental    method of apportionment,
     the cost of delivery    rooms may not be charged
     against the program because medicare benefi-
     ciaries  do not use the facilities   in question.


                                  24
     The same is true with respect     to the combination
     method of apportionment."

       In a February 1970 report to the Commissioner of So-
cial Security,     the HEWAudit Agency recommended that the
combination method of apportioning      costs to the Medicare
program be eliminated      or modified because it resulted    in a
hospitalOs   being reimbursed for costs applicable      to private
room accommodations and to delivery      rooms, which appeared
to be specifically     excluded from reasonable costs as de-
fined in the Medicare law.




                                 2.5
Differences    among methods of   apportionment

       As mentioned previously,     delays in making final settle-
ments were attributed     by certain    intermediaries  to questions
involving   the different   apportionment     methods authorized     by
SSA. To determine the significance          of these questions,    we
examined 139 first-year     and 100 second-year hospital        cost
reports for hospitals     in 32 states and Puerto Rico for which
final settlement     had been made by various intermediaries.
A summary of Medicare inpatient        costs allowed under each re-
imbursement method for the audited cost reports included in
our sample follows.

                         Hospital              Medicare inpatient
                       cost reports              costs allowed
 Apportionment                 Percent          Amount       Percent
  method used        Number (note a>        (000 omitted)   (note b)

Departmental            29         12             $ 5,631            8
Combination with
  cost finding        103          43              42,003        56
Combination with
  estimated per-
  centages            JcJ          45              26,818        36

       Total          m           100             $74,452       &g
aSSA  made a comparable analysis   of about 1,000 first-year
 hospital  cost reports.    SSA's analysis   showed that about
 9 percent of the hospitals   had used the departmental. appor-
 tionment method, that about 46 percent had used the combi-
 nation method with cost finding,     and that about 45 percent
 had used the combination method with estimated percentages.
bThe 1,000 first-year   cost reports analyzed by SSA involved
 Medicare inpatient   costs of about $215 million.   This anal-
 ysis showed that about 7 percent of the costs had been ap-
 portioned  to Medicare on the basis of the departmental
 method, that about 61 percent of the costs had been appor-
 tioned on the basis of the combination method with cost
 finding,  and that about 32 percent had been apportioned    on
 the basis of the combination method with estimated percent-
 ages.


                                  26
       For 100 of the 103 hospitals       in our sample that used
the   combination method with cost      finding,   we were able to
compare the amounts of Medicare        costs allowed   with the
amounts of Medicare costs that would have been allowed           if
the departmental  method had been used.
      Our comparison showed that the Medicare program costs
allowed under the combination method had been $40,810,000
and that the program costs under the departmental          method
would have been $39,Bl7,000--a     difference     of $1,693,000,    or
about 4 percent of the costs allowed.         Further,   our analy-
sis of this 4-percent   difference    by size of hospital--a
comparison of the costs for hospitals       with less than 100
beds with the costs for hospitals       with 100 or more beds--
showed that, for hospitals     in both groups, the differences
in the amounts of Medicare costs allowed had averaged about
4 percent.

       Of the total    difference    of $1,693,000,    about $320,000,
or 20 percent,     was attributable      to routine   service   costs,
including    the private     room differential,     and about
$1,373,000,     or 80 percent,     was attributable    to ancillary
costs,    About $627,000, or 46 percent of the $1,373,000,
was due to the inclusion         of delivery    room costs in the com-
bination    method.

        Because of the lack of final   settlements,  a random
sample of audited cost reports for all hospitals       for the
first    two reporting  periods could not be developed.     We be-
lieve,    however, that, programwide, the differences     between
the costs apportioned     to the Medicare program under the de-
partmental    and combination methods of apportionment     are
significant.

        Both our analysis    of 239 first-year    and second-year
hospital    cost reports and SSA's analysis        of about 1,000
first-year    hospital   cost reports     showed that only about 10
percent of the hospitals       had elected to use the more accu-
rate departmental      method.    We believe that it is reasonable
to assume that those hospitals        that used the combination
method with cost finding       elected to do so because its 'use
resulted    in higher Medicare reimbursements.



                                  27
       Benefit payments for inpatient       hospital    care totaled
about $4.4 billion      in fiscal year 1970, and SSA estimated
that these payments would total about $5.8 billion             in fis-
cal year 1971. Therefore,         if the results     of our sample of
audited cost reports are representative           for those hospitals
that used the combination method with cost finding             for the
first   two reporting    periods,   the elimination     of that method
of apportioning     costs would result     in a reduction     of Medi-
care payments to hospitals        by over $100 million      annually,

      Further,   we are aware of some instances during the
early years of the program in which hospitals           elected to
use the combination method with estimated percentages be-
cause its use resulted       in higher Medicare reimbursements
than either of the apportionment        methods which required
cost finding,     Therefore,    if the 4-percent difference      be-
tween the amounts apportioned        to Medicare under the combi-
nation method and the departmental        method also applied to
those hospitals    that used the combination method with esti-
mated percentages     for the first    two reporting   periods but
that were required to use cost-finding         procedures for sub-
sequent periods,    the elimination     of the combination method
could reduce annual Medicare payments to hospitals            by as
much as $200 million     annually.




                                 28
Delays   by SSA in resolving  questions
regarding methods of apportionment

       In May 1968 SSA furnished    RCA and other intermediaries
with a tentative    and preliminary   draft of certain  instruc-
tions dealing with the use of the combination method of ap-
portionment.     These instructions   were to be applied for re-
porting   periods ended after June 30, 1968.
       Regarding the apportionment      of the costs of routine
services for hospitals       that had several types of accommoda-
tions (private     rooms, semiprivate    rooms, and wards)) the
draft instructions      provided that, in preparing       cost reports,
the hospitals    give recognition     to cost differences      which
could be attributable       to the space utilized     (such as depre-
ciation,   maintenance,     and housekeeping expenses).         Other
costs not related      to space were to be apportioned        in the
normal method on the basis of inpatient-days.             Regarding
delivery   room costs, the May 1968 draf;t stated,         in part,
that:

         "Total allowable costs of a provider        shall be ap-
         portioned     between program beneficiaries     and other
         patients    so that the share borne by the program
         is based upon actual services received by propram
         beneficiaries.

         O'Thus, the regulations    require    that provider    costs
         be apportioned   so that the program pays only for
         services   that are actually     rendered to benefi-
         ciaries.    Where services such as delivery         room
         are not used by program beneficiaries,         the costs
         of such services may not be included in allow-
         able costs.    Moreover, the charges applicable          to
         the cost of such excluded services should be ex-
         cluded from total patient      charges for ancillary
         services   in developing    the ratio to determine the
         program's share of ancillary        costs."
         (Underscoring   supplied)

      The draft instructions were not finalized    by SSA. In
response to an inquiry from a congressional     subcommittee,
SSA stated in August 1969 that its intermediaries     had ad-
vised SSA that the proposed instructions    would not be fair

                                       29
to the hospitals  because, in apportioning   costs to Medicare,
they did not consider all elements of cost, such as nursing
costs which were incurred    to a greater degree by Medicare
patients  than by non-Medicare patients.

       SSA stated also that, because it had not satisfied          the
concern of hospitals    about the Medicare program's paying its
full share of nursing costs and in the light of the action
taken by HEW in June 1969 to eliminate       from the reasonable-
cost formula the Z-percent allowance in lieu of specific
recognition    of other costs, 1 SSA believed    that it was inap-
propriate   to impose a policy which would result       in further
reducing the program's share of hospital        costs.

        In November 1969 SSA advised the American Hospital          As-
sociation     that it was prepared to modify the Medicare reim-
bursement formula to recognize a nursing-cost         differential
of up to 8-l/2 percent of nurses' salaries.         SSA estimated
that this modification     would result   in an increase of Medi-
care reimbursements     to providers   of about 1.2 percent.        For
fiscal    years 1970 and 1971, SSA estimated that these in-
creased costs would be $60 million       and $75 million,      respec-
tively.

      In April 1970, in responding    to the February 1970 HEW
Audit Agency recommendations    (see p* 25) to eliminate     or
modify the combination    method of apportionment,    SSA stated
that the whole question of the combination method would be
evaluated but that it would be a mistake to move too quickly
to eliminate   the combination  method for apportioning     hospi-
tal costs because of the impreciseness      of any apportionment
method.


'Under the original          (November 1966) "Principles      of Reim-
 bursement for Provider Costs", an allowance for costs not
 specifically       recognized was included as an element of al-
 lowable costs.         For all providers     except proprietary    insti-
 tutions,     this allowance was 2 percent of the total other
 allowable     costs, after excluding       interest   expense.    For
 proprietary      institutions,     the allowance was l-1/2 percent
 of other allowable          costs, after excluding    interest   expense
 and the return allowed to such institutions              on their equity
 capital.

                                    30
GAO observations  concerning
use of combination method

        We recognize that any method of apportioning           allowable
costs between Medicare and non-Medicare patients             which is to
be applicable      to about 7,000 hospitals      will result    in ap-
proximations     which will be subject to continuing         modifica-
tions and adjustments       if some definite     and uniform reim-
bursement formula is not established.            We recognize also
that, as long as the combination method with eskimated per-
centages (which did not require the use of cost-finding                pro-
cedures) was authorized         to be used to allocate     costs between
routine services and total ancillary          services,    a determina-
tion of the direct and indirect         costs of any particular        an-
cillary    department or service,      such as delivery     rooms, might
not have been possible        for all hospitals.

       As noted on page 21, however, effective       with reporting
periods ended after December 31, 1968,,the        combination
method with estimated percentages was 'no longer authorized,
and all hospitals     were required to use cost-finding      proce-
dures.    Therefore the only essential    difference     between the
departmental    method and the combination method insofar as
hospital   recordkeeping   is concerned is that under the depart-
mental method the Medicare and non-Medicare charge data must
be maintained     for each ancillary  department whereas under the
combination method=        Medicare and non-Medicare charge data
must be maintained only for total ancillary         charges,

      Under these circumstances      it appears that most hospi-
tals participating     in the Medicare program should have the
capability    to use the more precise departmental    method for
apportioning     the costs of ancillary   services.




                                     31
CONCLUSIONS

       The settlement   process was delayed by SSABs problems
in producing timely and accurate provider           reimbursement re-
ports which could be used by hospitals          in preparing     their
cost reports and by the intermediaries          in the audit of the
cost reports.      We believe that SSA should establish          a defi-
nite timetable     for developing   timely and reliable       reimburse-
ment reports that can be useful to hospitals            and intermedi-
aries in the settlement      process or should consider other al-
ternatives,     such as authorizing    intermediaries     to prepare
reimbursement reports.

       The use of the combination     method of apportioning       hos-
pital   costs between Medicare and non-Medicare patients           re-
sulted in increased costs to the program through inclusion
of costs which either were not covered under the program or
were not applicable     to Medicare beneficiaries.        In addition,
the option to use this method resulted        in delays in making
final settlements    by some intermediaries     because they con-
sidered its use inconsistent      with the Medicare law.       We
therefore    believe that the option of hospitals       to use the
combination    method should be discontinued,      at least as a ba-
sis for apportioning     the costs of ancillary     services.

RECOMMENDATIONSTO THE SECRETARY
OF HEALTH, EDUCATION, AND WELFARE

       We recommend that HEW (1) provide for SSA to establish
a definite    timetable   for the development of effective,         use-
ful, and timely provider        reimbursement reports for use by
hospitals    and intermediaries      in the settlement   process or
consider other alternatives,         such as authorizing    intermedi-
aries to prepare the reports and (2) discontinue            or modify
the use of the combination method of apportioning            hospital
costs between Medicare and non-Medicare patients.

AGENCYCOMMENTS AND ACTIONS
AND GAO EVALUATION

       In a letter dated September 28, 1970, HEW furnished            us
with   its comments on our findings and recommendations.             (See
app.   I.>



                                   32
  Provider   reimbursement   reports

         Regarding SSA"s problems in producing timely        and reli-
  able provider reimbursement reports for use in the settle-
  ment process9 HEN advised us that SSA had decided to concen-
  trate   on actions to overcome the problems encountered,
  rather than to consider alternatives,       such as authorizing
  intermediaries     to prepare reimbursement   reports,    and that,
  accordingly,     SSA did not intend to discontinue     preparing     the
  reimbursement reports.       According to SSA, most of its prob-
  lems were associated with processing      the bills    rather than
  with its inability      to produce the necessary data.      SSA
  pointed out that it was experiencing      60-day delays in re-
  ceiving the bills     from the hospitals  and intermediaries.

         HEM expressed the belief that the potential       of the re-
  ports as a tool for internal      administration   and appraisal
  warranted continuing     their preparation.      HEWalso stated
  that there were economies to be obtained by SSA's producing
. the reports as a by-product      of its central data processing
  operations   rather than having each intermediary       produce the
  reports.    HEWlisted    seven steps that SSA proposed to take
  to find solutions     to the problems that had hindered it in
  producing effective,     useful,  and timely reports.

        Regarding HEWS comments concerning the delays in proc-
  essing bills    by hospitals    and intermediaries,      our review of
  SSA statistics    indicated    that, during calendar years 1969
  and 1970, the average total times for processing            an inpa-
  tient hospital    bill1 were about 90 days and 100 days, re-
  spectively.     About 60 days elapsed after the intermediary
  had approved the bills.        In other words, there was a period
  of about 30 days between the time that the intermediary              ap-
  proved the bills      and SSA received them, and another 30 days
  elapsed before SSA processed the bills.            On the basis of
  these statistics,      it appears to us that the intermediaries
  are in a position      to develop hospital    reimbursement and
  charge data on a more timely basis than SSA.


  1The total processing time is calculated   from the date of
   the patient!s  discharge or the date of the hospital's  in-
   terim bill to the date that the bill is processed TO tape
   in SSa.
                                       33
            Regarding      the steps that SSA proposed         to take to find
    solutions      to the problems        that had hindered      i.~ in producing
    effective,       useful     and timely    reimbursement    reports,    we noted
    that actions        similar    to three of the seven steps cited           by
    HEW had been attempted            by SSA at various     times after     the
    origination       of the reimbursement         reports  in January 1967
    without     solving      the problems.

    Combination      method

            In commenting      on our recommendation     to discontinue       or
    modify    the use of the combination        method of apportioning
    hospital     costs,    HEW stated   that reducing    or minimizing      Medi-
    care payments to hospitals          was not a legitimate      objective      in
    itself    in view of the congressional         mandate that hospitals
    be reimbursed       for the reasonable     costs of providing       services
    to Medicare      patients.

            HEW advised    us that SSA had been giving               intense     study
    to the combination        method as part of its complete                reexamina-
     tion of Medicare      cost reimbursement.           HEW advised        us also
    that these studies        had shown that it might achieve                 its ob-
    jective    of determining      full     reasonable     costs of services
    provided    to Medicare      beneficiaries        by restricting        the use of
    the combination      method to certain          types or sizes of facili-
    ties.     We were further      advised      that HEW was in the process
    of reaching     a decision     on this matter        and would advise us
    when the final      decision    was made.

           In January 1971 HEW informed          us that,    in accordance
    with an agreement     with the Senate Committee            on Finance,       a
    decision    had been made to require         larger   providers     (e.g.,
    those having 100 or more beds) to use the more accurate                      de-
    partmental    method to apportion       costs to the Medicare          pro-
    gram.    The smaller    providers    (e.g.,     those having less than
    100 beds) will     be required    to use a more simplified           method
I
I   of apportionment.       HEW expected      these new requirements           to
j   apply to reporting      periods   beginning       on or after    July 1,
    1971.

s
R   pating
           Although     over half
               in the Medicare
                                   of the number of hospitals      partici-
                                  program have less than 100 beds, dur-
    ing fiscal      year 1970 about 20 percent      of the Medicare     pay-
    ments to hospitals       for inpatient   services    were made to

                                           34
hospitals  having less than 100 beds and $0 percent of the
payments were made to hospitals    having 100 or more beds.
Therefore we estimate that HEWS decision to discontinue
the use of the combination method of apportioning    costs  by
the larger hospitals  could result in a reduction   of Medi-
care payments to hospitals   of from $80 million  to $160 mil-
lion a~ually.~

       The foregoing changes in reimbursement methods will
require changes in the Code of Federal Regulations               pertain-
ing to Medicare.        In accordance with the Administrative           Pro-
cedure Act (5 U.S.C. 552 am.),               HEWhas followed the
practice   of initially     publishing     such regulation    changes in
the Federal Register in the form of a proposal,              which
thereby affords interested         parties   the opportunity     to fur-
nish their views or arguments for consideration              by HEW be-
fore the changes are adopted finally,

      As of April 30, 1971, the changes relating        to (1) the
use of the departmental    method to apportion Medicare costs
for larger providers    and (2) the use of simplified      methods
of apportionment   for smaller providers     had not been pub-
lished by HEW in their proposed form although HEN had ini-
tiated informal consultations     with affected   parties.

        We believe that, before the changes in regulations    are
finalized,     HEW should consider the following matters with
regard to reimbursements to hospitals.

       1. As pointed out in HEWcomments, the reduction         of
Medicare payments to hospitals       is not a legitimate   objective
in itself.     In line with this reasoning,     we believe that the
departmental    method of apportioning    the costs of routine
services (ratio     of Medicare charges to total charges) may be
inequitable    to some hospitals   because the differences      be-
tween hospital    charges for private    and semiprivate   accommo-
dations may not be representative       of the differences    in


1In February 1971 testimony before a subcommittee               of the
 House Committee on Appropriations,     HEWestimated            that the
 change would save $100 million     in Medicare costs           for fiscal
 year 1972.

                                     35
costs between such accommodations.   Therefore we believe
that some alternative method of recognizing   cost differences
between various types of accommodations should be developed
by SSA.

       2. In our opinion,    the number of beds in a hospital
should not be the sole criterion      for determining      whether the
departmental   apportionment    method or a more simplified
method should be used for Medicare reimbursement purposes.
For example, there is not necessarily       a relationship     between
the number of beds in a hospital      and the level of hospital
expenses because of such factors as the type of hospital
(long-term   or short-term)    and the variances    in the types of
services furnished.

      From data obtained from material published by the Amer-
ican Hospital Association,   we identified   about 250 hospitals
in the United States which had between 90 and 100 beds. The
annual level of expenses reported by these hospitals        ranged
from about $400,000 to over $3 million.      Overall,    about 44
percent of the 250 hospitals   had reported annual expenses of
less than $1 million,   about 47 percent had reported annual
expenses of between $1 million   and $2 million,      and about
9 percent had reported annual expenses of over $2 million.

        Also a hospital's   bed capacity would not necessarily   be
indicative    of the amount of Medicare reimbursement because
of the variances      in the level of expenses as well as vari-
ances in the extent that Medicare patients      used hospital   fa-
cilities.

      For example, in our sample of 100 second-year cost re-
ports (see p. 261, we noted that the annual Medicare reim-
bursable costs for hospitals   having 50 to 99 beds had ranged
from about $80,000 to about $500,000 whereas the annual
Medicare reimbursable   costs for hospitals having 100 to 150
beds had ranged from about $20,000 to about $675,000.     Al-
though there was an overall   tendency for the hospitals  hav-
ing the higher number of beds to receive the higher Medicare
reimbursement,  we noted that about 30 percent of the hospi-
tals having 50 to 99 beds had Medicare costs of over
$300,000 a year whereas about 17 percent of the hospitals
having 100 to 150 beds had Medicare costs of less than
$300,000.

                                  36
      We believe that the total hospital       expenses and the
previous Medicare reimbursements        should be included among
the factors    to be considered   in determining    whether the de-
partmental   or a simplified    apportionment    method should be
authorized   for hospitals.




                                 37
                              CHAPTEX3

       DELAYS BY HOSPITALS IN SUBMITTING COST REPORTS

        SSA instructions      require that, within 90 days after the
end of a provider's         accounting period, a cost report be filed
with the intermediary.        1 For the first   reporting     period,
only about 150 hospitals,          or less than 7 percent,     of the
2,245 hospitals       serviced by the 13 Blue Cross Plans submitted
first-year     cost reports within the prescribed         90-day period.

      The graph on page 40 shows the rate of submission of
cost reports to the 13 intermediaries    during the 2-l/2-year
period from March 31, 1968, through September 30, 1970, for
accounting periods ended on or before June 30, 1967 (first-
year reports),  June 30, 1968 (second-year    reports),  and
June 30, 1969 (third-year  reports).     *

        At March 31, 1968, about 1,610 hospitals,         or about 72
percent,    had submitted first-year        cost reports.   Excluding
the 150 hospitals     that had filed on time, the remaining
1,460 hospitals     were, on the average, about 4 months late.
The 635 hospitals     that had not filed first-year        cost reports
at March 31, 1968, were, on the average, about 9 months late
at that time.      At September 30, 1970, or 3 years after the
first-year    cost reports were due, about 1 percent of the
hospitals    still  had not filed    first-year    cost reports.

        We did not note any improvement in the submission of
second-year cost reports.         For example, as indicated   by the
graph, at March 31, 1968, and September 30, 1968, respec-
tively,    72 percent and 87 percent of the first-year       cost re-
ports had been submitted to the intermediaries.           At compar-
able times applicable       to the second-year cost reports
(March 31, 1969 and September 30, 19691, about 62 percent
and 83 percent,     respectively,    of the 2325 second-year cost
reports had been filed.

     Furthermore, although all 2325 third-year cost reports
were due by September 30, 1969, only about 40 percent of


1See footnote   on pe 13.

                                   38
these reports had been submitted by that time.          There was
some later improvement, however, in the submission of third-
year cost reports.     For example, at March 31, 1970, about
90 percent of the third-year       cost reports had been filed;
whereas, at comparable times applicable        to the first  and
second reporting   periods (March 31, 1968 and 19691, 72 per-
cent and 62 percent,    respectively,    of the cost reports had
been filed,




                                39
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k                                                       2s
                                                        Ei;i
2                                                       z>
P
Lu-
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C-             -s------------------------------
           f




     -b-       --------------------------------~




                                                   40
CAUSESOF DELAYS IN SUBMISSION
OF COST REI'ORTS

       Some of the causes of delays in the submission of cost
reports by hospitals   were unique to the first      or second re-
porting periods and would not necessarily       represent   problem
areas for future reporting     periods, Other causes seemed to
represent   continuing  problems in administration     of the pro-
gram.

     The most common causes of delays which could be attrib-
uted to the newness of the program were as follows:

        1. Decisions by hospitals       and intermediaries   in certain
           geographical    areas to devise special cost report
           forms which generally       were not made available   for
           use until    several months after the end of the first-
           year reporting     periods,

        2. Lack of appraisals   of property on which claims           for
           depreciation  expense were to be based.

        3. Lack of      SSA instructions      regarding methods of appor-
           tioning     costs between Medicare and non-Medicare          pa-
           tients     for certain     hospitals    which (a) charged all
           patients      a single all-inclusive        daily rate, regard-
           less of     the services received,         or (b) made no
           charges      at all.

        4. Difficulties  encountered by hospitals     in obtaining
           agreements with hospital-based    physicians   to deter-
           mine amounts to be claimed for reimbursement as a
           hospital'cost  under part A of the Medicare program
           and amounts to be claimed as physicians1      services
           to individual  patients   under part B of the program.

      We believe       that many steps have been taken by SSA, the
intermediaries,        and the hospitals to alleviate these causes
of delays.

Continuing     causes of delays

        Other causes of delays in the submission of cost             re-
ports    by hospitals were (1) inadequacies  in hospital
                                      41
accounting    systems and insufficient   numbers of hospital
personnel capable of preparing Medicare cost reports and
(2) delays by accounting     firms employed by hospitals     in com-
pleting   financial  audits before submission of cost reports.

     Our observations      relating        to these   problem areas are
set forth below.

      Inadequacies     in hospital   accounting        systems
      and insufficient     numbers of
      hospital    personnel qualified
      to prepare reports

      Representatives of hospitals,    intermediaries,    and ac-
counting firms responsible   for auditing    hospitalsD   Medicare
cost reports most frequently    cited the following     causes for
delays in submitting  cost reports,

      1. Problems associated     with adapting rather unsophisti-
         cated hospital     accounting    systems to the Medicare
         cost-reimbursement     principles     and related reporting
         requirements.

      2. Insufficient    numbers of hospital          personnel   capable
         of preparing    cost reports.

These problems    were particularly         troublesome    to smaller   hos-
pita1s.l
      With the exception of certain       governmental    institutions
that used the cash basis of accounting,         SSA principles       of
reimbursement required    that cost reports be prepared on the
accrual basis of accounting.       Under the accrual basis, rev-
enues were to be recognized     in the period earned, regardless
of when billed  or collected,    and costs were to be recognized
in the period incurred,    regardless     of when paid,     The use of
the accrual basis of accounting       required modifications         to


1
 About 55 percent of the hospitals    included in our review
  and about 50 percent of all hospitals     participating in the
 Medicare program are facilities   with less than 100 beds.


                                      42
hospital accounting   practices, such as (1) developing  in-
ventory systems to account for supplies when used rather
than when purchased and (2) recording   revenues during the
period services were furnished   rather than at the time the
patient was discharged.
       The SSA principles    of reimbursement also required    that
charges for services rendered to Medicare patients         be sepa-
rated from charges for services rendered to non-Medicare
patients.    This separation    is necessary for developing    a
ratio of charges to Medicare patients        to total patient
charges9 which is the basis for apportioning         costs between
Medicare and non-Medicare patients.

        As discussed in chapter 2, when the SSA reimbursement
report proved unreliable         for providing   these data and when
a hospital's     accounting    system failed   to provide a systematic
segregation     of charges between Medicare and non-Medicare          pa-
tients,    this information      had to be compiled retroactively      by
the relatively      few hospital     personnel qualified   to perform
this task.

        Because data needed to properly       allocate  hospital    over-
head costs to revenue-producing         departments had not been
systematically    accumulated by many hospitals,         it was neces-
sary to compile such data through examination            of various
source documents.       This  was  a time-consuming    task  which rel-
atively    few hospital    employees were available      to perform.

       To deal with the anticipated     problem of inadequacies       in
hospital    accounting   systems, the  SSA  contracts  with the   in-
termediaries     provided that one of the intermediaries'      func-
tions was to assist hospitals       in establishing   and maintain-
ing fiscal    records to meet the purposes of the Medicare act.

       In fulfilling      this contractual        provision,    BCA and its
subcontractors       conducted or participated           in numerous seminars
and other educational         activities       to familiarize    hospital
personnel with SSA's principles              of reimbursement     and related
requirements       concerning    the preparation        of Medicare cost re-
ports.    As indicated       by the results       of our review, the SUC-
cess of these educational           activities     varied.



                                    43
       Differences     in intermediary    workloads and in the nature
and size of hospitals        serviced made it difficult       to make
comparative      evaluations   of intermediary     performance.      We
noted, however, that four of the 13 intermediaries               included
in our review had achieved comparatively            good results      in
obtaining     timely cost reports from hospitals         by furnishing
hospitals     onsite assistance      in preparing   their first-year
Medicare cost reports.

       For example, for the first        reporting      period, one Blue
Cross Plan which serviced 22 hospitals             followed the prac-
tice of granting      a hospital    one 30-day extension,          and, if
the report was not received within that time, the Plan's
personnel visited      the hospital     and actively       assisted hos-
pital personnel in preparing         the cost report.          Early in the
program, a second Blue Cross Plan which serviced about 105
hospitals    established   a separate division          within its orga-
nization   to actively    assist the hospitals          in adapting their
accounting    system to meet Medicare cost reporting               require-
ments.
       At March 31, 1970, the first        Plan received and made
settlements    for all first-,      second-, and third-year    cost
reports.     For the first     three reporting   periods,   the second
Plan received cost reports from about 74 percent of its hos-
pitals   within 3 months after the dates that the reports
were due.

      Delays by accounting firms         in
      completing regular hospital          audits

       Another cause of delays in the submission of hospital
cost reports frequently        cited by intermediary         and hospital
personnel was the time required by auditing              firms employed
by the hospitals      to complete their audits of the hospitals'
financial     statements.     In such instances,      hospitals    delayed
submitting     their Medicare cost reports until           the auditing
firms had prepared the report or until           the hospitals       had
decided to submit the cost reports based on unaudited fi-
nancial data.       We noted that hospitals      in the same geograph-
ical area often had reporting        periods ending on the same
date.     Further these reporting     periods often ended during
the public accounting professionVs          busy season--thus        reduc-
ing the probability       that the hospitals'      statements would
receive early attention        by the auditing     firms.
                                    44
       The following   table shows (1) the Medicare reporting
periods,    as of March 1970, for the 2,325 hospitals       included
in our review and (2) the accounting      periods for Federal tax
reporting    purposes for about 5,200 community-type      hospitals
included-in     an American Hospital  Association   nationwide
survey e About 37 percent of the hospitals        in each sample
selected periods ending December 31.

                        Percent for                Percent for
                         hospitals          hospitals     included in
       Reporting        included in           American Hospital
    period ending       GAO review          Association's       survey

      Sept, 30               13.0                      19.4
      Dee, 31                37.2                      3605
      June 30                31,2                      28.5

           Subtotal           8104                     84,4

      Other dates             18.6                     15.6

           Total            lzoovep                   100.0

       To meet the due date for submission of Medicare cost
reports,   hospitals  having reporting      periods ending on De-
cember 31 required that audits of their financial               statements
be made during the tax season, the peak work load period for
the public accounting     profession.      Because the accounting
firms customarily    charged hospitals--as       nonprofit,       service-
type organizations--   institutional     rates which were lower
than their usual rates, we noted that hospital              audits did
not receive top priority       during the accounting        firms'    busy
season.

       We believe that these delays would be alleviated      if
certain hospitals,    particularly    those with fiscal years end-
ing December 31, would change their Medicare reporting          pe-
riods so that the periods would end when outside profes-
sional accounting    assistance    would be more likely to be
available.

     The above table shows that over 80 percent of the hos-
tals included both in our review and in the American Hospi-
tal Association's  nationwide survey selected reporting

                                      4.5
    periods ending on September 30, December 31, or June 30 for
    Medicare and Federal tax reporting       purposes*    As discussed
    in more detail    in chapters 4 and 5, the tendency of hospi-
    tals in the same geographical      area to select the same Medi-
    care reporting    periods also contributed     to delays in the
    desk audit and field audit steps of the settlement          process
    because intermediaries"     work loads were not distributed
    evenly throughout     the year,

    Steps taken by SSA to reduce delays
    in submission of cost reports

          Early in the program hospitals       were advised by a number
    of Blue Cross Plans that Medicare regulations          did not pro-
    vide for a penalty for late submission of cost reports.
    Because there were no penalties,       there was little    incentive
    for hospitals   to submit cost reports within the 90-day pe-
    riod specified    by the SSA instructions     unless they believed
    that the payments made by the intermediaries         on an esti-
    mated basis during the year had been too low, Officials              of
    some hospitals   acknowledged to us that they were in no hurry
    to submit cost reports,    because the reports would presumably
    show that interim payments to their hospitals          had been too
    high and it would be necessary to refund the overpayments
I
    to the intermediary.
#
Y          In November 1967 SSA authorized     its intermediaries    to
    reduce interim payments for those hospitals        that did not
    file cost reports within a reasonable period after the cost
    reports were due.     In only a relatively     few instances  did
    the 13 intermediaries    included in our review take this ac-
    tion.

            We believe that the intermediaries0             reluctance      to use
    this approach for the first           reporting     periods of the pro-
    gram was attributable        to the fact that many intermediaries
    were not in a position         to process cost reports because of
    insufficient      staff or because SSA had not approved subcon-
    tracts    for the auditing       of the cost reports.          Further,    the
    cost reports that had been submitted,              in many cases, were
    incomplete or inaccurate          and were either returned to the
    hospitals     for correction      or were held by intermediaries
    pending receipt       of additional      information.       We believe that
the imposition  of penalties    for the initial reporting     peri-
ods would have done little    to expedite the overall     process
of making final  settlements.

       In September 1969 SSA instructed     intermediaries     to re-
duce or to suspend interim payments to hospitals           and other
providers   that failed   to submit completed cost reports on a
timely basis,    These  instructions   provided that interim pay-
ments be reduced when a cost report was overdue by 1 month
and that payments be suspended when a cost report was over-
due by 3 months.

       As shown by the graph on page 40, there was an improve-
ment in the submission of third-year          cost reports after
September 30, 1969, which we believe was attributable,               in
part, to the steps taken by SSA to impose penalties              for sub-
mitting   late reports.      Because our   review  did  not   include
an evaluation    of the accuracy of the cost reports          submitted
by the hospitals,    we    could not determine    whether   the   more
timely submission of the third-year         cost reports would re-
sult in expediting      the overall  settlement    processe




                                   47
CONCLUSIONS

       As pointed out on page 44, some intermediaries             that
have provided onsite assistance         to hospitals     in adapting
their accounting      systems to meet Medicare cost reporting           re-
quirements or have provided hospitals           with onsite assistance
in preparing     their cost reports have achieved relatively
good results     in obtaining   hospitals'    cost reports on a
timely basis.       For fiscal years 1968 and 1969, the Medicare
administrative      costs of these intermediaries       were not out
of line in relation       to the administrative      costs of other
intermediaries     of comparable size, which suggested to us
that such assistance       was not unduly expensive.        We believe
that other intermediaries       could achieve similar       results    by
adopting the approach of providing         such onsite assistance
where it is needed.

        Also, as discussed on pages 45 and 46, we believe that
greater diversity     in cost reporting   periods for hospitals
would facilitate     (1) the hospitals'   obtaining   timely out-
side professional     assistance  in preparing    and auditing    cost
reports and (2) the intermediaries'       processing    and auditing
of cost reports on a more current basis, through more even
distribution     of work loads over the year.

RECOMMENDATIONSTO THE SECRETARY
OF HEALTH, EDUCATION, AND WELFARE

        We recommend, therefore,        that the Secretary of HEW,
through SSA (1) instruct          intermediaries     to provide increased
onsite assistance        to those hospitals      which may still   need
help in adapting their accounting             systems to meet Medicare
cost-reporting      requirements      and (2) encourage hospitals     to
adopt different       cost-reporting     periods to provide more even
distribution      of intermediaries'      work loads and to facilitate
the preparation      and/or audit of cost reports by the hospi-
tals'    accounting    firms.

AGENCYCOMMENTS AND ACTIONS
AND GAO EVALUATION

      BCA, in a letter     to SSA dated July      14, 1970, commented
on our draft report.       (See app. II.)


                                   48
Increased    assistance

       BCA stated that it supported our recommendation that
intermediaries       should provide increased onsite assistance
to hospitals      in meeting Medicare cost-reporting        requirements
but further      stated that SSA had established      very restrictive
guidelines     concerning the allowable      time available     for this
purpose.     I-lEM"s September 28, 1970, letter      to us commenting
on our recommendations pointed out that, although it agreed
with us that during the first         years of the program inade-
quate accounting       systems had been the cause of delays in the
submission of cost reports,        the problem had since been mini-
mized.     FEW also advised us, however, that it supported our
view that intermediaries        should provide onsite assistance
in those cases in which providers          continued to need it.

Adoption    of different    cost-reporting    periods

        Concerning our recommendation that SSA encourage hospi-
tals to adopt different       cost-reporting       periods,     HEW stated
that, as an alternative       to our proposal,        SSA was considering
changing its instructions        to require that Medicare cost re-
ports cover the same reporting          periods and have the same due
dates as the providers"       annual reports to Internal           Revenue
Service.     HEN stated also that, even if conformity              with the
Internal    Revenue Servicels      reporting    period did not change
the date that the providerqs           cost-reporting       year ended, it
would affect     the date that the provider's           cost reports were
due and therefore      would result      in a more even distribution
of intermediariesP      work load, because all cost reports would
not be due at the same time.           For example, nongovernmental
hospitals'     annual reports to the Internal           Revenue Service
are due from Z-l/Z to 4-l/2 months after the hospitals"                  re-
porting    periods have ended, depending on the type of organi-
zation; whereas, under existing            SSA instructions,      all pro-
vider's    cost reports are due (1) within 90 days after the
end of a provider9s      reporting     period or (2) within 120 days
after the end of a providers          reporting     period if the pro-
vider elects to file a certified            cost report.       (See pp. 10
and 13,)

        Although the proposed changes in SSA instructions   may
facilitate     the intermediariesD processing and auditing  of
cost reports through more even distributions     of work loads

                                    49
over the year4 hospital~~          reporting      periods,      in most in-
stmces,    are the same for both Medicare and Internal                     Reve-
nue Service reporting       purposes--as         shown on the table on
page 45. Therefore we believe that, although the proposed
change may result     in a fewer number of hospitals                  being de-
kinquent in filing      cost reports,        it will not necessarily
reduce the overall      length of time taken to make final                  set-
tlements.     For example, the longest period for filing                    a
cost report under the SSA proposal (4-P/2 months) would be
applicable    to voluntary      nonprofit      institutions        which rep-
resent about 55 percent of the hospitals                  participating       in
the Medicare program.         For these voluntary            nonprofit     hospi-
tals, the settlement       process would begin 4-l/2 months after
the end of a hospitalss         reporting      period rather than
3 months after the end of the reporting                  period as provided
for under the existing        instructions.
       We believe,     however, that the SSA proposal has some
merit, particularly       where it can be adapted to expedite the
overall    settlement    process.     According to SSA's August 1970
instructions      to its intermediaries,       settkments    for hospi-
taPsI cost reports that have been certified              as accurate by
the hospitals"      independent auditors       would normally be made
without field audits by the intermediary              and would eliminate
one step of the settlement         process.     Therefore we believe
that, if the due dates for submitting             Medicare cost reports
are extended to conform to the Internal             Revernue Service re-
porting dates, the authority          to use the extended due dates
could be granted by SSA as an incentive             to encourage more
hospitals    to file certified       cost reports and would help
shorten the overall       settlement     process.    We suggest SSA
consider adopting such an approach.
                                CHAPTER4

                      DELAYS BY INTERMZDIARIES

             IN DESK AUDITS OF HOSPITAL COST REPORTS

       After the hospitals'       Medicare cost reports are submit-
ted to intermediaries,        the  second step of the settlement
process involves       (1) desk audits of the cost reports by the
intermediaries      to ascertain    whether the reports are complete
and to detect obvious errors or inconsistencies          and (2) ten-
tative    settlements,    under which excessive interim payments
are to be recovered from hospitals          or any amounts due hospi-
tals are to be paid as promptly as practicable.            The desk
audits of cost reports are also the basis for adjusting            in-
terim payment rates to hospitals.

       Although practices       followed by each of the 13 interme-
diaries    in making desk audits and tentative              settlements
varied, we believe that these intermediaries                 could be placed
into two groups.        One group-- nine intermediaries,             servicing
about 1,230 hospitals        during the first        reporting     period--
generally    made detailed      desk audits,      returned     incomplete or
erroneous cost reports to hospitals             for correction,        and
made tentative      settlements      on the basis of the hospitals'
corrected    reports.      The other group-- four intermediaries,
servicing    about 1,015 hospitals         during the first        reporting
period--generally       did not perform all or some of these func-
tions.

      The causes and the extent of any delays experienced  by
these two groups and steps taken by SSA to upgrade the desk
audit function  are discussed in the following sections of
this chapter.

INTERMEDIARIES WT MADE BOTH DETAILED
DESK AUDITS AND TENTATIVE SETTLEMENTS

      Of the 13 intermediaries,    nine made desk audits with
the objective   of identifying   obvious errors and inconsisten-
cies in cost reports and also made tentative      settlements
with hospitals.    The principal   causes of delays experienced
by these nine intermediaries     in completing desk audits and

                                       51
making tentative    settlements  were (1) the need for addi-
tional  information   from hospitals  to complete or correct
cost reports and (2) the lack of sufficient      staff to per-
form all required    desk audits during peak workloads.

        Because of these problems, significant     backlogs of un-
audited cost reports applicable      to either the first    or sec-
ond reporting     periods developed for six of the nine inter-
mediaries.     Further,   for two of the nine intermediaries,
these backlogs developed with respect to the third report-
ing period.     The status at selected dates of desk audits for
first-,    second-, and third-year   cost reports for these nine
intermediaries     is shown in the following   table,

                                        cost
                                     reports         Desk audits
                                   received           completed     Backlogs

First-year   cost reports:
      March 31, 1968                       843                701      142
      September 30, 1968                1,055                 954      101
Second-year cost reports:
      March 31, 1969                       813                557      256
      September 30, 1969                1,081                 944      137
Third-year   cost reports:
      March 31, 1970                    1,178            1,014         164
Return   of incorrect    cost reports          to hospitals

       Of the 701 first-year    cost reports for which desk au-
dits were completed at March 31, 1968, 211 were completed
within 15 days after receipt      of the cost reports.    The re-
maining 490 desk audits required more than 15 days to com-
plete,   and, depending upon the intermediary,     the average
time between receipt      of the cost report and completion of
the desk audit ranged from about 1 month to 3 months.

       Of these 490 cost reports,        it was necessary to return
196 reports to the hospitals         as unacceptable     or to hold
them until    additional    information    was received from the
hospitals.     Further,   40 of the 142 cost reports for which
desk audits were not completed at March 31, 1968, had been
returned to hospitals      for correction       or were being held
pending receipt      of additional    information    from the hospitals.

                                   52
Insufficient    intermediary    staff

      Officials    of seven of the nine intermediaries           advised
us that insufficient      staff contributed      to delays in making
desk audits and tentative        settlements.      For example, all
105 hospitals     serviced by one intermediary        had fiscal     years
ending June 30. Therefore all cost reports were due at the
same time.      Our review of the intermediaries'         records showed
that, for desk audits that were completed at March 31, 1968,
the average period of time between receipt            of the cost re-
port and completion of the desk audit was about 2 months.
In May 1968 officials      of this intermediary       advised us that
the same organizational       group that performed desk audits
also assisted hospitals       in adapting their accounting         systems
to meet Medicare cost-reporting          requirements   and that the
intermediary's     six-man staff was not large enough to per-
form both functions.

      At March 31, 1968, another intermediary,          servicing
about 320 hospitals      during the first   reporting    period, had
received 103 first-year       cost reports of which 85 had been
desk audited.      For 66 of these reports (including         11 re-
ports rejected     by the intermediary),    the time between re-
ceipt of the cost report and completion of the desk audit
averaged about 2 months,        In April 1968 officials       at this
intermediary     advised us that only five of the 12 positions
authorized    for the hospital    reimbursement department had
been filled,     which was the principal    reason for the delays
in completing desk audits.




                                    53
 INTERPIEDIARIESTHAT DID NOT MAKE
%TH
--    DETAXLEDDESK AUDITS AND
TENTATIVE SETTLEMENTS

      Our review showed that four intermediaries     had not fol-
lowed the regular settlement     process with respect to desk
audits and tentative   settlements.

      One intermediary,     servicing    about 60 hospitals,     did not
return cost reports to hospitals         after making desk audits
but, rather,made    Medicare field audits at hospitals          with its
own staff.    Because these field audits usually         started
within a month after receipt        of the cost reports,     and some-
times even before cost reports were received,          this interme-
diary handled its desk audits and field audits as virtually
the same function,      This approach expedited the overall         set-
tlement process.

       Another intermediary,       which serviced about 230 hospi-
tals during the first       reporting   period, made desk audits and
returned cost reports containing         obvious errors or incon-
sistencies    to hospitals     or held such reports pending receipt
of additional    information,       Generally,    however, it did not
make tentative     settlements     with hospitals    for the initial
accounting periods,      because, even after desk audits,         inter-
mediary personnel had doubts concerning the accuracy of the
cost reports.

       At March 31, 1968, this intermediary    had returned to
hospitals   or was holding for further   information   39 of its
backlog of 46 unaudited cost reports.       The length of time
that had elapsed since these cost reports initially        had been
s,ubmitted by hospitals   averaged about 4 months.

       Two intermediaries,     which serviced about 540 and 185
hospitals,    respectively,    during the first      reporting    period,
made only superficial       desk audits for the first-year         cost
reports.     Officials    of both intermediaries      advised us that
detailed   desk audits of cost reports had not been made be-
cause of a lack of staff.        Further,   tentative     settlements
were not made with a hospital        unless it had requested that
it be paid the amount due or unless it had s,ubmitted with
its cost report a check for the indicated           amount due to the
Medicare program.       Both these intermediaries        subcontracted

                                   54
the field audit f,unction to public accounting   firms and re-
lied on the firms'    field audits as a basis for identifying
and correcting  deficiencies    in cost reports.

       As discussed in the following      chapter of this report,
intermediaries    often experienced extensive     delays in initi-
ating field audits.      We believe that such delays, coupled
with the failure     to identify    cost reports containing  obvious
errors or inconsistencies,       tended to increase the amount of
time needed to complete field audits, because, with the pas-
sage of time, deficiencies       in cost reports became more dif-
ficult   to resolve.

STEPS TAKEN BY SSA TO UPGRADE
DESK AUDIT FUNCTION

       In July 1968 SSA recommended to its intermediaries      that
they reduce the number and scope of field audits of cost re-
ports.    The purposes of this recommendation were to reduce
auditing   costs and to expedite the settlement    process.    To
implement this policy,    SSA advised the intermediaries    that,
in determining    the number and scope of field audits to be
made, it would be necessary for them to make analytical        desk
audits of cost reports p giving
                            '      consideration to the results
of prior years" field audits,
       In August 1969 SSA furnished   intermediaries   with a de-
tailed audit program for making des'k audits of hospital      cost
reports to assist them in deciding whether there was a need
for field audits of particular     hospital  cost reports.

      In August 1970 SSA placed further   importance on the
desk audit function  by instructing   its intermediaries    that,
in every case in which a field audit was to be scheduled,
its scope should be determined by the intermediary       on the
basis of a comprehensive desk audit of the cost report.
CONCLUSIONS
       The major cause of the delays in making desk audits of
Medicare cost reports was the Lack of adequate intermediary
staff.    Because of the increased importance being placed by
SSA on the desk audit step of the settlement     process, we be-
lieve that SSA should carefully    review the staffing

                                  55
requirements    of intermediaries.  Where staffing problems
continue,    SSA should require BCA to assign high priority     to
resolving    such problems.
RECOMMENDATIONTO THE SECRETAEY
OF HEALTH, EDUCATION, AND WELFARE

      We recommend, therefore, that the Secretary of HEW,
through SSA, require BCA to render more assistance     to indi-
vidual Blue Cross Plans in obtaining   and training   staff
needed for making desk audits of provider    cost reports.
AGENCYCOMMENTS
             AND ACTIONS

       In its July 14, 1970, letter      to SSA commenting on our
draft report,    BCA stated that it supported our recommenda-
tion and that it had initiated       action in the area of staff
recruitment.     HEW's September 28, 1970, letter     to us also
inidcated    concurrence with our recommendation,      HEW stated
that, since November 1969, SSA had been closely monitoring
intermediaries'      provider reimbursement and audit activities
with particular      emphasis on ensuring that intermediaries
had sufficient     trained in-house staffs to make desk audits
of cost reports.




                                56
                              CHAPTER5

                    DELAYS BY INTERMEDIARIES
           IN MAKING FIELD AUDITS OF HOSPITAL COSTS

      The third step of the settlement       process involves  field
audits of hospital     accounting  records and related statis-
tical  data supporting     the cost reports.

       SSA instructions    provide that all hospital        cost reports
be subject to audit.       In April     1967 SSA instructed     its in-
termediaries     that, regardless      of the amount of Medicare re-
imbursement, all hospital       first-year    cost reports for peri-
ods ending September 30, 1966, and later should be audited.
In September 1967 SSA modified these instructions             to pro-
vide that, if the annual rate of Medicare reimbursement was
under $25,000 for a given period, a field           audit would not be
required    for that period if, in the intermediary's           judgment,
such an audit would not be necessary.

        In July 1968 SSA further    modified its instructions    and
recommended that the number and scope of field audits be
limited     on the basis of (1) the intermediaryss     prior experi-
ence with a hospitales       cost reports and (2) the analytical
desk audits of the cost reports.         For the first  three Medi-
care cost-reporting     periods (periods ending on or before
June 30, 1967, 1968, and 19691, about 98 percent of the hos-
pital     cost re orts included in our review were scheduled for
field audits. P

DELAYS IN STARTING FIELD AUDITS

       The graph on page 58 shows for the Z-l/2-year    period
from March 31, 1968, through September 30, 1970, the com-
parative   progress of the 13 intermediaries   included in our

1
 In August 1970 SSA advised its intermediaries             that, because
 of fund limitations      for provider    audit activities      during
 fiscal    year 1971, only about one third of the cost reports
 for which field audits had not started           at that time could
 be undertaken.      Similar restrictions      were imposed on the
 number of field audits to be started          for cost reports      to be
 received during fiscal       year 1971 (fourth     and fifth    year
 reports).
                                   57
-------------------------------------
                                                                     I




-------------P----I------------------
                                                                     1




-------------------------------------                                -4




-----s-b-----------------------------
                                                                     1


             I               I          I   I   I    I   I   I   I           I
                            P               %        %       A           0




                                                58
review in starting   field audits for the first     three report-
ing periods in relation     to the number of cost reports re-
ceived.   As of September 30, 1970, or over 3 years after
the end of the first    reporting  period,   field audits of first-
year cost reports were not started      for about 4 percent of the
hospitals  included in our review.      At that date, or over
2 years after the end of the second reporting       period,     field
audits of second-year cost reports were not started         for
about 13 percent of the hospitals.

       Further,   as indicated  by the graph, there was no im-
provement with regard to starting        field  audits between the
first   reporting   period and the second and third reporting
periods.      For example, at September 30, 1968, field audits
were not started     for about 14 percent of the first-year        cost
reports    that had been received.,     By comparison,   as of Sep-
tember 30, 1969, field audits were not started          for about
35 percent of the second-year       cost reports received,     and, as
of September 30, 1970, field audits were not started           for
about 40 percent of the third-year         cost reports received.

Methods of making field       audits

      Intermediaries       made field audits by essentially        two
methods.     For first-year       cost reports,     three of the 13 in-
termediaries    included in our review,         which    serviced a total
of about 190 hospitals,         madelfield    audits primarily    with
their own staffs       (in-house).       The remaining 10 intermedi-
aries primarily      subcontracted      with public accounting     firms
to make field audits.

       For second-year    cost reports,   one of the three interme-
diaries    that had made about 75 percent of the first-year
hospital    audits in-house subcontracted      for about 85 percent
of its second-year hospital       audits because of the backlog
of first-year     cost reports   to be audited by the intermedi-
ary's staff.      On  the other  hand,  two intermediaries  which

1
 One of the three intermediaries     which serviced about 105
 hospitals   subcontracted   for about 25 percent of its first-
 year hospital    field audits.



                                       59
serviced    about 465 hospitals    and had subcontracted      about 90
percent   of their  first-year   field   audits,    made about 45 per-
cent ofthefield     audits ofsecond-year       cost reports   in-house.

       For the third-year             cost reports,        the trend toward mak-
ing in-house       field     audits      continued.        The intermediary         that
had changed from in-house                to subcontracted         field     audits    for
the previous       year's      reports      changed back to making field
audits   primarily        in-house.         The two intermediaries            which
serviced     465 hospitals           and which had made about 45 percent
of their     second-year         hospital      audits    in-house      made about
50 percent      of their       field     audits    of third-year         cost reports
with their      own staffs.           Also,     for third-year        cost reports,
another    intermediary,           which serviced        22 hospitals,        changed
from subcontracting            field     audits     to making about 70 per-
cent of the audits           in-house,.

        In summary, for the 13 intermediaries            included    in our
review,     about 10 percent     of the field     audits    of first    year
cost reports     were made in-house;      about 15 percent         of the
field     audits  of second-year    cost reports      were made in-house;
and about 25 percent       of the field     audits    of third-year      cost
reports     were made in-house.

         Although       delays     in starting         field      audits     were encoun-
tered under both methods,                  we noted that those intermediaries
that had made field               audits     primarily        with their        own staffs
had made substantially                better     progress         in reducing        the back-
logs of field           audits     to be started           than those intermediaries
that had subcontracted                most of their           field     audits.        The fol-
lowing      table     shows the comparative                progress        in starting
first-year        field     audits      by the three          intermediaries           that
made such audits             in-house-and        by the 10 intermediaries                   that
primarily        subcontracted          the field        audit      functions.
                                                             irs t-
                                                                 and   Field       Audits      StarteQ


                                        cost   reports                   Field      audits
                                                   .




           Mar.      31,   1968      155             1,426             112            1.140                43           286              27.7           20.1
           Soot.     30.   1968      174             1.752             172            1.486                  2          264                1.1          15.1
           &.        31;   1969      187             1)545             165            1;557                  2          288                1.1          15.6
           Sept.     30,   1969      187             1,964             166            1,760                  1          204                    .5       10.4
           Mar.      31,   1970      167             1,994             187            1,865                -            129                  .            6.5
           Sept.     30,   1970      187             2.010             167            1,948                -             62                               3.1

           %cludcs         cost   reports      for       which    intermediaries              determined         that   field   audits          rare   not
            nsceasery.
Delays in starting            field      audits
made by intermediary              staffs

       The primary    cause for delays    in starting    field  audits
by the staffs     of the intermediaries      was an uneven audit
work load resulting       from many hospitals     having   the same
cost-reporting     periods.

         Of the three intermediaries               that made first-year             hos-
pital     audits     with their      own staffs,        one intermediary           which
serviced      about 60 hospitals           did not encounter            any delays        in
starting       field    audits    for the first          three reporting         peri-
ods.      This intermediary          generally       started     field     audits
within     a month after        receipt      of the cost reports            and, in
some instances,          even before       cost reports         were received.
For the first         reporting      period,     virtually       all hospital          cost
reports      were due by March 31, 1967.                   Because of delays           in
submission         of cost reports,        however,        no more than seven
reports      were received        by the intermediary            during     any of the
next 12 months,           Therefore,       a   backlog      of  unaudited       cost re-
ports     did not develop.           Similar     conditions        existed      for both
the second and third            reporting       periods.

        The two other       intermediaries        that initially          made field
audits    with their      own staffs       were delayed        in starting        field
audits    because many of the hospitals                which they serviced
had identical       reporting      periods.       For example,         for one in-
termediary,      the lapse of time between the completion                       of
desk audits      and the start        of field      audits    averaged        about
5 months.       This intermediary          serviced       23 hospitals        of which
19 had a reporting          period    ending December 31.              Of these cost
reports,      15 had been received          and had had desk audits               com-
pleted    by June 30, 1967, which,              in turn,     created      a schedul-
ing problem      for the intermediary's             field    audit     staff.

        Similar      backlogs     developed    for the second and third
reporting       periods.      For example,       at March 31, 1969, or a
year after       the second-year          cost reports    were due, the in-
termediary       had received        20 second-year     cost reports      but had
not started        field    audits    of seven reports.         At March 31,
1970, the intermediary             had received      22 third-year     cost re-
ports     but had not started           field  audits   of 15 reports.




                                             61
Delays in starting      field   audits
under subcontracts      with
public accounting     firms

      SSAls    contract  with BCA provided that audit subcon-
tracts with public accounting          firms be subject to approval
by SSA. The 10 intermediaries            included in our review, which
had initially     subcontracted     for this service,   awarded sub-
contracts     of about $6 million      to public accounting   firms for
field audits of hospital        cost reports for the first      report-
ing period.

       We noted that these intermediaries        that had subcon-
tracted for field audits could be divided into two general
categories.    One group--four    intermediaries      servicing     about
605 hospitals   during the first     three reporting      periods--
assigned1 cost reports     for field audits prior to SSA ap-
proval of the audit subcontracts,        although such approval
was eventually   obtained.

       The second group--six    intermediaries,      servicing  about
1,450 hospitals     during the first   reporting    period and about
1,530 hospitals     during the second and third reporting        peri-
ads=--generally    did not assign cost reports to public ac-
counting firms for field audits until         the audit subcontracts
had been approved by SSA. Delays in starting             field audits
were usually    longer for intermediaries       in the second group.

        For example, at March 31, 1968, the four intermediaries
that had made audit assignments before SSA approval of the
audit subcontracts     completed desk audits of 425 first-year
cost reports and assigned 350 of these reports for field au-
dits.     About 80 percent of these audit assignments were made
within 2 weeks after completion of the intermediaries'         desk
audits.     For 3 of the 4 intermediaries,   Medicare field au-
dits were made by the audit subcontractors      simultaneously
with field audits of cost reimbursements under the Blue
Cross commercial insurance programs.


1An assignment means that the intermediary            had forwarded
 the cost report to the public accounting           firm with in-
 structions  to start the field audit.

                                    62
        In contrast,       at March 31, 1968, the six intermediaries
that did not make field           audit   assignments      before    SSA approved
the audit       subcontracts    completed       desk audits    of 885 first-
year cost reports          and assigned    790 of these reports          for field
audits.       Only about 35 percent        of the audit       assignments    were
made within       2 weeks after      completion     of the desk audits.          A
principal       cause of the intermediaries'           delays    in starting
field     audits    was the difficulty        in obtaining     SSA approval      of
the audit       subcontracts.

        The primary       reasons      given by SSA for initially            refusing
to approve      intermediaries'           audit  subcontracts        were  that
(1) proposed       average rates          of compensation,        which ranged as
high as $116 a day, were considered                    excessive,      (2) estimates
of time required          to make audits        were too high,         (3) estimates
for travel      and/or      incidental      expenses were too high,            and
(4) certain       deviations        from the wording          and format   of the
prescribed      model subcontract           were unacceptable          to SSA. As
shown by the following             examples,     difficulties        in obtaining
SSA approval       of audit       subcontracts       contributed       to delays     in
starting    field     audits      of first-year        cost reports.

       One intermediary,            servicing       about 160 hospitals           during
the first      reporting      period,        completed     desk audits        of about
40 first-year         cost reports         in March and April           1967.     The
audit    subcontracts,        however3 were not approved                  by SSA until
July,    August,      and October        1967, which caused delays              of from
4 to 6 months in assigning                 these cost reports           for field      au-
dits.     Another      intermediary,          servicing      about 180 hospitals
during     the first      reporting       period,       completed     its desk au-
dits of about 60 cost reports                    in June and July 1967; however,
its audit      subcontracts        were not approved            until     September     and
October      1967, which resulted              in delays     of about 3 months in
assigning       these cost reports             for field     audits.

        Delays resulting         from difficulties      in negotiating        ac-
ceptable     audit    subcontracts       extended   beyond the first        re-
porting     period.      For example,       in March 1969 SSA had not ap-
proved audit        subcontracts      for second-year     cost reports        for
five of the 10 intermediaries               that subcontracted       for audit
services      for the first-year         reports.    These audits       were to
be made at hospitals           that had cost-reporting         periods    that
ended between July 1, 1967, and June 30, 1968.                      Two of the


                                            63
five intermediaries     generally  did not assign cost reports
for field audits until     the audit subcontracts   had been ap-
proved by SSA.      At March  31, 1969, these  two intermediaries
received about 175 second-year cost reports but field audits
were started on only 19.

Steps taken by SSA to reduce
delays in starting f,ield audits

        In April 1969 SSA advised its intermediaries         to de-
velop at least a limited       in-house capability    for making
field audits.      SSA pointed out that such a capability        would
facilitate     the implementation    of limited-scope    audits,  as
well as the administration        of audit subcontracts.

      In August 197'0 SSA instructed       its intermediaries     to
encourage hospitals    to submit cost reports        that were certi-
fied as accurate by hospitals'        independent auditors.       Al-
though these certified     cost reports would be subject to the
same comprehensive desk audits as other cost reports,             SSA
advised its intermediaries       that such certified      cost reports
normally should not be scheduled for field audits.             If SSA's
new policy  is successful,     the field audit step of the set-
tlement process, as it was administered         during the period
covered by our review, would be changed significantly             and
its delaying effect would be minimized considerably.




                                  64
DELAYS IN COMPLETIONOF FIELD AUDITS

       The SSA model subcontract    for use by intermediaries         in
obtaining    audit services provides that the accounting         firm
furnish a written    audit report to the intermediary        within
3 months from the date that the firm receives the cost re-
port from the intermediary.       The subcontract     provides also
that this period may be extended by agreement between the
intermediary    and the accounting    firm.    For the intermediaries
included in our review, about one third of the first-year
audits performed under subcontracts         were completed within the
3-month period.

       The graph on page 66 shows for the 2-l/2-year            period
from March 31, 1968, through September 30, 1970, the com-
parative    progress in completion of field audits by the 13
intermediaries      for the first   three cost-reporting      periods in
relation    to the number of field audits started and the num-
ber of cost reports received.          At September 30, 1970, over
3 years after the end of the first         reporting    period,    about
6 percent of the first-year       field audits were not completed.
At that date, over 2 years after the end of the second re-
porting period, about 17 percent of the field audits were
not completed for second-year cost reports.

       As indicated   by the graph, however, there has been pro-
gressive    improvement in completing     field audits for the first,
second, and third reporting      periods.      For example, at Septem-
ber 30, 1968, of the 1,660 first-year          field audits started,
706, or about 43 percent,      were not completed.        At the com-
parable time applicable      to the second reporting       period (Sep-
tember 30, 1969), of the 1,259 field audits started,             191, or
about 15 percent,     were not completed.        At the comparable
time applicable     to the third reporting       period (September 30,
1970>, of the 1,345 field audits started,            106, or only about
8 percent,    were not completed.
      As indicated     on page 60, for the first,        second, and
third reporting      periods,    the proportion    of field audits made
by the intermediaries'        staffs progressively      increased.     Over-
all, however, about 85 percent of the field audits for the
first   three reporting      periods were subcontracted       to public
accounting    firms.


                                    65
“_IW---IU----.-=.~_I------I_s.“.-._I--I~_*-.---_-----
                                                                                                         -4




----_LT--.--J           ._._---..-!   _. .._.._ - -L--.   ._ .-L----.--L   __ --I   ---._I-.--_.--L--J
                                                   ‘:                                          0          D
Delays in completing      field            audits
under subcontracts     with
public accounting    firms

         Some of the causes cited            to us by intermediaries           and
public     accounting     firms     as contributing         to delays    in the
completion      of subcontracted         field    audits     were (1) the lack
of action      by the intermediaries           to enforce      contract     provi-
sions concerning         completion      of audits       and (2) the reluctance
of public      accounting      firms   to render       the type of opinion         that
they believed        was required      by SSA instructions           regarding     cer-
tification      of the accuracy        of specific        items on cost reports.

        In addition         to the foregoing      causes,     which were specifi-
cally     applicable        to the field    audit   step of the settlement
process9       delays were also caused by inadequacies                  in hospital
accounting         systems which caused problems             in verifying        the in-
formation        shown on the cost reports          to hospital        accounting
records      (see ch. 3) and by the unwillingness                 of hospitals       to
accept audit          adjustments    and/or   to prepare       revised     cost re-
ports     (see ch. 6).         In some instances        intermediary       officials
cited     two or more reasons          for delays     in completing        subcon-
tracted      field     audits.

       Subcontract         provisions       not     enforced

       The 10 intermediaries               that subcontracted             with account-
ing firms       for the audits          of first-year          cost reports          gener-
ally   did not enforce            the provision         in the audit         subcontracts
that field        audits     be completed        and a written          report       submit-
ted to the intermediary                not later      than 3 months after              receipt
of a cost report           by the accounting            firm.      Officials         at six
intermediaries,          servicing        about 1,210 hospitals              during      the
first    reporting       period,       advised    us that less-than-standard
rates were negotiated               with the public           accounting       firms     with
the understanding             that the intermediaries              would not require
that Medicare          audits     be given top priority             during        the ac-
counting     firms'      busy season.

       The accounting      firms      advised     us that their      delays      in
completing      the audits     resulted,       in part,      from the lack of
timely    advice   from the intermediaries               regarding   interpreta-
tions    of the SSA reimbursement            principles.


                                               67
        Problems in obtaining opinions
        on cost reports from public accounting           firms
        The SSA model audit subcontract     provides that indepen-
dent    audits of hospital    costs be made by public accounting
firms     in accordance with generally    accepted standards appli-
cable     in the circumstances.     Such audits,   as a minimum, must
meet    the requirements    of the audit instructions    and guide-
lines     issued by the Secretary of HEW.

        The initial   audit instructions       issued in June 1966, as
well as the cost report forms issued in September 1966, in-
cluded a pro forma certification           to be used by the account-
ing firm in rendering        an unqualified      opinion attesting    to
the accuracy of the cost report in conformance with the SSA
principles     of reimbursement.      The pro forma certification
for an unqualified       opinion made specific        reference   to cer-
tain data shown on cost reports,           such as inpatient-days      and
occasions of service in the outpatient             department,   because
SSA considered such data valuable in developing program
statistics.       The instructions    also included certain pro
forma language for rendering         a qualified      opinion or no opin-
ion.

        The public accounting profession         objected to highlight-
ing certain     specific     data in the certification    because it
implied    a degree of accuracy of such data which was not war-
ranted by the scope of the audits.            In June 1967 SSA issued
revised guidelines       to intermediaries,      which changed the pro
forma certification        to conform to language suggested by the
American Institute       of Certified    Public Accountants.
        As much as a year later,       five intermediaries,       which
serviced about 965 hospitals         during the first     reporting      pe-
riod, and/or their subcontractors          were apparently      not aware
of the June 1967 changes because corresponding              changes had
not been made in the cost report forms.            For example, three
intermediaries,      servicing    about 550 hospitals,      started about
330 field audits before March 31, 1968, for which only one
was completed at that time.          These audits were assigned or
in process for an average of about 6 months.              Intermediary
officials    and officials     of the accounting    firms advised us
in May and June 1968 that a major cause of delays involved
disagreements    concerning     the format of the auditors'         certifi-
cation which had been changed by SSA to meet the accounting
profession's    objections     about a year earlier.
                                      68
CONCLUSIQNSAND AGENCYCOMGNTS

       For those intermediaries      making field audits prinei-
pally with their 0-m staffs,        a major cause of the delays in
starting   the field audits was the uneven distribution         of
the intermediaries!    wsrkloads resulting       from many hospitals
serviced by a particul..ar     intermediary   having the same
Medicare reporting    period,      Our recommendation providing
for a more even distribution        of intermediaries1   workload by
emsouraging certain        spitals   ta change their Medicare re-
portimg period and HEW's comments thereon are discussed in
chapter 3.
       For intermediaries   subcontracting     the field audit func-
tions 9 major causes of delays in starting           and completing
field audits included (I) difficulties         in obtaining        SSA ap-
proval of the audit subcontracts       and (2) the Pack of action
by the intermediaries     to enforce the contract provision            con-
cerning the timely completion of field audits.               Partially
bec,ause of these problems with subcontracted           field audits,
a number of intermediaries     progressively       increased the pro-
portion of field audits ma.de by their own staffs             (in-house)
for the second and third reporting        periods.

       In commentirag on the delays in making field audits,
HEW, in its September 28, 1970, letter        to us, pointed out
that over 40 of the 74 Blue Cross PIalas and half of the
commercial intermediaries      were making some field audits
with their own staffs.       HEId also stated that (1) the inter-
mediaries had szlbstantiaPly      increased the number of limited-
scope audits and (2) SSA's August 1970 instructions         to the
intermediaries     had given new emphasis to the no-audit/
limited-scqe-audit      approach by requiring    mire final settle-
ments to be made without ffePd audits.

       SSAss August 1970 instructions     provided for a signifi-
cant departure   from the settlement     process as it was carried
out during the eriod covered by our review in that as many
as two thirds of the settlements      with hospitals   may be made
without any field audits,      These instructions    provide,  IXYW-
ever, that hospital   cost  reports for which settlkments      have
been made be subject to an intermediary        audit and appropri-
ate adjustment within 3 years from the time that a cost re-
port is due to be submitted or is submitted to the interme-
diary.
                                     69
      Because the foregoing  changes in the field audit step
of the settlement   process had not been implemented at the
time of our field reviews, we did not evaluate the overall
effect of such changes on settlements    with hospitals.
Therefore we are making no specific   recommendations with
respect to the field audit function   at.this  time.




                            70
                             CHAPTER6

     DELAYS IN MAKING FINAL SETTLEMENTSWITH HOSPITALS

       The HEWcontract      with BCA and the BCA subcontracts
with Blue Cross Plans provide that intermediaries        make fi-
nal,annual    determinations     of the amount of payment to be
made to each hospital       for the reasonable cost of services
furnished   to eligible     Medicare beneficiaries.   These final
settlements    by Blue Cross Plans which complete the settle-
ment process are subject to review and concurrence by BCA.

        The HEW contract with BCA also provides that BCA es-
tablish    and maintain an appeals procedure for resolving  any
payment dispute arising     between a hospital and a Blue Cross
Plan.     The BCA appeals procedures is in addition  to any
mechanisms of the local Blue Cross Plans for handling such
disputes.

       During the period of our review, no appeals mechanism
for resolving    disputes over BCA payment determinations        was
available    to hospitals  or other providers.1      As a matter of
practice,    however, through September 1970, the BCA appeals
procedure was not used extensively      by hospitals.*     Final
settlements    usually were made on the basis of negotiations
between local Blue Cross Plans and hospitals.

1
 A provision   in a bill   (H.R. 175501, which was passed by the
  United States Senate on December 29, 1970, but which failed
  of enactment during the 9lst Congress, would establish         an
  appeals board to hear appeals on reimbursement decisions
 made by intermediaries     such as BCA, under certain    condi-
  tions, and where the amount at issue was $10,000 or more.
2
  For example, at September 30, 1969, the 13 intermediaries
 had a backlog of 1,833 audited first-       and second-year cost
  reports for which final settlements     had not been made; only
  nine of these 1,833 cost reports had been held up pending
  resolution  of disputes through the BCA appeals procedure.
 At September 30, 1970, the 13 intermediaries       had a backlog
  of about 2,350 audited first-,     second-, and third-year     cost
  reports for which final settlement     was not made. At that
  time BCA had 14 hospital    appeals in process.


                                  71
        The graph on page 73 shows for the 2-l/2-year          period
from March 31, 1968, through September 30, 1970, the com-
parative    progress in completion     of final settlements      by the
13 intermediaries     included in our review for the first
three cost-reporting      periods in relation     to the previous
steps in the settlement       process,   At September 30, 1970, or
over 3 years after the end of the first         reporting    period,
final settlements     were not made with about 32 percent of the
hospitals    included in our review.      At that date, or over
2 years after the end of the second reporting           period,    final
settlements     were not made with about 62 percent of the hos-
pitals.

      For those final    settlements  that had been made, SSA re-
ported that about 88     percent had cleared the BCA review
process and had been     submitted to SSA for its review and use
in developing  program    statistics,   cost analyses, and cost
estimates.

       There was no improvement in making final settlements
between the first     reporting   period and the second and third
reporting   periods.    For example, at September 30, 1968, 954
field audits of first-year       cost reports were completed; how-
ever, final   settlements     were not made for about 58 percent
of these cost reports.

      At the comparable time applicable    to the second report-
ing period (September 30, 1969), 1,068 field audits of
second-year cost reports were completed,but      final settle-
ments were not made for about 84 percent of these reports.
At the comparable time applicable    to the third reporting
period (September 30, 19701, 1,239 field     audits of third-
year cost reports had been completed, but final settlements
had not been made for about 65 percent of these reports.
CAUSESFOR----
          DELAYS IN MAKING FINAL SETTLEMENTS

       Officials    of nine of the 13 intermediaries    indicated
that delays in making final settlements        were due primarily
to difficulties      in obtaining hospitals'   agreements to audit
adjustments      and in obtaining adjusted cost reports from the
hospitals.



                                   72
73
       For example, at September 30, 1969, two intermediaries
in one State, which serviced about 550 hospitals           during the
first   reporting    period and about 580 hospitals      during the
second reporting      period, had 329 first-year     and 78 second-
year field     audits completed,    These intermediaries,      however,
had made settlements       for only 49 first-year    and 14 second-         '
year cost reports.        According to SSA these two intermedi-
aries attributed      the backlogs of audited cost reports for
which settlements      had not been made to the failure       of hos-
pitals   to submit adjusted cost reports and to the Plans'
lack of authority       to require hospitals    to submit revised
cost reports.

       In August   1969, however, SSA issued instructions     to
intermediaries,     which were designed to simplify    the revision
of the reports     to consider minor adjustments without re-
quiring that a     revised cost report be prepared in entirety.

STEPS TAKEN
      ----- BY BCA TO MAKE FINAL SETTLEMENTS
WITHOUT AGREEMENTS WITH HOSPITALS

        To reduce backlogs of audited cost reports for which
settlements     had not been made, BCA, in April 1969, advised
local Blue Cross Plans that, if hospitals             delayed in sub-
mitting    revised cost reports,     the Plans should prepare cor-
rected reports.      Further,    if hospitals    did not agree with
audit adjustments,      local Plans were instructed         by BCA to
 (1) prepare revised cost reports incorporating             proposed ad-
justments and (2) give the hospitals           an opportunity     to sub-
mit statements outlining       their objections.        Final settle-
ments could then be made by the local Plans on the basis of
adjusted reports,     and hospitals    could file appeals with the
local Plans.      As stated previously,       concurrence by a hospi-
tal or other provider       is not necessary for an intermediary
to make a final settlement.

      The following    table shows that, between March 31, 1969,
and September 30, 1970, a solution         had not been found to the
problem of reducing the backlogs of audited first-           and
second-year    cost reports for which settlements       had not been
made. These statistics       indicated   to us that issuance of
BCA's April 1969 instructions        had not materially   reduced
delays in making final settlements.


                                    74
                                 ----       March 31,    ---___
                                                         1969              --      September
                                                                                       --       30270
                                           First-year        Second-year            First-year         Second-year
                                                                                                         ----
                                 Total    cost reports      cost reports   Total   cost reports       cost reports

Field     audits    completed    1,550         1,252               298     3,977        2,092              1,885
Final     settlements     made      716       --- 671            -- 45     ?,395        u25               -- 873

        Backlog                  --E3
                                 -__          .I_
                                              581                252
                                                                 --        &!i!i           570            l9J2
                                                                                                           --7
Backlog as a percent
  of field audits    com-
                                              --36.4
  pleted                           53.8                          !sl
                                                                 --.-      ,m             27.2
                                                                                        =z=               = 53.5
                                                                                                            zzz=
                                                .-_-.




       We believe that there is a need for more direct BCA
involvement with those local Blue Cross Plans having acute
problems with final settlement         backlogs.      For those Plans
having particular    difficulties       in making final     settlements,
we believe that, after field audits have been completed,
providers    should be given reasonable time limits within
which to submit adjusted cost reports,             If providers     fail
to meet these deadlines,        we believe   th'at   BCA'should    prepare
the adjusted cost reports and should notify             the providers
that the amount of final settlements          had been determined.
We believe also that appeals of such BCA determinations
should be made directly        to BCA rather than to the local
Plans.

RECOMMENDATIONTO TRE SECRETARYOF
HEALTH, EDUCATION, AND WXLFARE

       We recommend that the Secretary of HEW, through SSA
require BCA to take a more active role in the final      settle-
ment process by directly    assisting   those local Blue Cross
Plans that have the most serious backlogs of audited cost
reports for which settlements      have not been made.

 AGENCYCOMMENTS  AND ACTIONS
 AND GAO EXALUN'ION

       In its July 14, 1970, letter     to SSA commenting on our
 draft report,    BCA indicated  that during 1969 it had issued
-or had participated     in SSA's issuance of certain      instruc-
 tions to the local Plans which were designed to resolve the
 backlog problem.     Most of the 1969 instructions       cited by
 BCA have been mentioned previously       in this report,     but, as

                                                            75
shown by the graph on page      73, as of September 30, 1978,
the backlog of audited cost      reports for which settlements
were not made continued to      exist,   This backlog indicates
to us that further   actions    are necessary.

        In its September 28, 1970, letter        to us commenting on
our recommendations,       KEW advised us that BCA did not have
sufficient     staff to become directly      involved in individual
provider     cost settlements.     HEW stated also that BCA"s role
in its relations      with the individual     Plans under the Medi-
care program was an administrative,         rather than an operative,
one.

       In our opinion,   the role of BCA under its prime con-
tract with HEW should be to require performance from its
subcontractors    (the local Plans) or to take such other steps
as may be necessary to fulfill       its coqtractual   obligations.
Such steps could include taking the initiative         in assisting
certain Plans in making settlements       with individual     provid-
ers, particularly     where such settlements     at a particular
Plan had been consistently      delayed for unduly long periods
of time.




                                  76
                              CHAPTER7

             DELAYS IN SETTEENEHTPROCESSFOR ECFs

        The causes of delays in the preparation     of hospital
cost reports and in the settlement      process for hospitals
have bean discussed in preceding chapters.         Although there
are variances between the cost-reporting       formats for ECFs
and hospitals,    the reimbursement principles     and the steps
usually followed in the settlement      process are the same.
Medicare benefits     for hospital services,   however, became ef-
fective    on July 1, 1966; whereas coverage for ECF services
became effective     on January 1, 1967, or 6 months later.

       At September 30, 1970, the 13 intermediaries           included
in our review were responsible         for making about 300 first-
year ECF settlements,        about 985 second-year ECF settlements,
and about 1,140 third-year         ECF settlements.     As shown by the
graph on page 78, the progress made by these 13 intermedi-
aries in the various steps of the settlement            process for the
first   three reporting      periods under the program was compara-
tively    slower for the ECFs than for the 2,245 hospitals            for
the first     year and the 2,325 hospitals       for the second and
third years serviced by these 13 intermediaries.              At Septem-
ber 30, 1970, final settlements         were made with about 33 per-
cent of the ECFs for their first-           and second-year cost-
reporting     periods and with about 16 percent for their third-
year reporting      periods.

CAUSESFOR DXFFERENCESBEmEN
HOSPITAL    ECF SETTLEMENTS

        Some of the reasons why settlements       with ECFs lagged
behind settlements    with hospitals     for the first   2 years were
that (1) ECFs had entered the program 6 months after hospi-
tals,    (2) SSA had not furnished    intermediaries    with cost re-
port forms for ECFs until. February 1968, and (3) intermedi-
aries had assigned hospital      audits and related     settlements
priority    over ECF audits and settlements.

     Because Medicare benefits    for extended-care services
became effective    on January 1, 1967, or 6 months after hospi-
tal benefits    became effective, only about 300 of the ECFs
sti
44% “1.111
        . . . . . . . ..s.............................”...................“.................~......................
                                                                                                                       1




5 =====’         ‘-..........9....D.........=.==-==..=..............=.-...~......~..............~...................        0
                                                                                                                           -z
z-
serviced by the 13 intermediaries   included in our review
had reporting  periods ended on or before June 30, 1947.
Therefore many of the ECFsD initial    cost reports would be
shown as second-year settlements.

      We noted that SSA had not furnished        ECF cost report
forms to intermediaries    until   February 1968, or at least
7 months after the end of the first       reporting     period for
those ECFs having reporting      periods ended on or before
June 30, 1967, and several months after many of the ECFs
having reporting   periods ended on or before June 30, 1968,
were supposed to have submitted initial        reports.

       Intermediary  officials   advised us that, because hospi-
tals received about 90 percent of the benefit      payments made
under part A of the Medicare program, they had assigned au-
dits and settlements      with hospitals priority over audits and
settlements    with ECFs.

SPECIAL SIGNIFICANCE OF DELAYS
IN SE'ITIEHE~S WITH ECFs

       Although ECFs received only about 10 percent of the
benefit     payments made under part A, the delays in making
settlements     with ECFs assumed special significance      because
of the relatively       large number of ECFs that had terminated
participation      in the program without having made settlements
with intermediaries.          By February 1969 about 700 ECFs had
terminated. 1      A year   later  ECF terminations had increased


1
 A termination     can take various forms.         In many instances,
  the termination     takes tie form of a change of ownership in
  that there is a change in the parties          to the provider
  agreement with SSA, but the old provider           could continue
  to operate the facility       in the program under a new agree-
 ment.     There also are voluntary     terminations       in which pro-
 viders elect to cease to participate          in the program and in-
 voluntary    terminations    in which SSA terminates        its agree-
 ment with the provider,       usually  for failure      to comply with
  the conditions    for participation     in the Medicare program.



                                   79
to 1,700,    and by December 1970 total        ECF terminations     has
increased    to 2,800.

        Of the 700 ECF terminations    by February 1969, about
150 had been under the jurisdiction        of the 13 intermediaries
included in our review.        About one third,  or 52, of these
terminations     had been under the jurisdiction    of one inter-
mediary.     We selected a sample of 17 of these 52 termina-
tions and found that, although these ECFs terminated          partic-
ipation    in the program between July 1967 and October 1968,
there were no final     settlements   made nor field audits com-
pleted by February 1970.

      Of the 17 ECFs, 10 had not submitted cost reports for
the reporting  period preceding their terminations.    Medicare
payments to these 10 ECFs for the periods for which cost re-
ports had not been submitted totaled   about $400,000.

        In view of the special significance           of the delays in
 settlements    with ECFs because of the large number of such
institutions      that have terminated      their participation      in the
prof3=n-b    we are   making   a review  to  determine     (1) the rea-
 sons why these providers        left the program, (2) the extent
that Medicare payments to terminated            providers    have not
been accounted for because of delays in settlements,               and
 (3) the extent and the reason for any overpayments made to
terminated     providers    not having been recovered.




                                   80
                                CHAPTER8

     CHANGESPROPOSEDBY HEW IN METHODSOF REIMBURSEMENT

                       TO PROVIDERSOF SERVICE

       In testimony before the Senate Committee on Finance in
February 1970, the Under Secretary of HEWproposed funda-
mental changes in the methods of reimbursing               providers    of
service under the Medicare program.             Such proposed changes
are also applicable        to the Medicaid program (State plans
for medical assistance        to indigent    families     and disabled
individuals     financed in part by Federal funds).              These pro-
posals, which would require changes in legislation,                  would
provide for reimbursements         to providers     at rates established
on a prospective       basis with incentives       for efficient      man-
agement rather than on a retrospective,              reasonable-cost
basis.

       The implementation       of the Under Secretary's      proposals
for prospective      reimbursements would practically         eliminate
the settlement      process as it is described in this report
and could involve such payment mechanisms as (1) preapproved
budgets or schedules of charges developed by committees
consisting     of representatives      of providers,    Blue Cross Plans,
private    insurance companies, the public,          and the Medicare
and Medicaid programs, (2) establishment             of target rates
based, in part, on known patient-care            costs for the past
period,    and (3) negotiations       with classes of hospitals       or
other providers      of comparable size and scope of service in
given geographical       areas.

       These prospective     payment methods could include certain
features   of the current retrospective       settlement  process to
the extent that they involved        (1) consideration   of prior
costs of providing      services and (2) negotiations      with in-
dividual   providers.

       If these matters cannot be handled more timely on a
prospective    basis than they have been handled on a retro-
spective basis, it can be expected that many of the problems
discussed in this report will hamper the effective     imple-
mentation of these proposals.      In other words, if costs
cannot be estimated and agreed to prospectively         on a more
timely basis than costs have been determined and agreed to
retrospectively,      the prospective reimbursements    could also
represent     payments for services long after they had been
furnished     and thereby could reduce incentives    for more effi-
cient management.

       The Social Security Amendments of 1970 (H.R. 175501,
which was passed by the House of Representatives      on May 21,
9970, but which failed    of enactment by the Ninety-first
Congress, would authorize     the Secretary of HEW to reimburse
providers   at rates established   prospectively on an experi-
mental basis only,

       According to the report of the House Committee on Ways
and Means (H. Rept. 91-1096) that accompanied the bill,           the
Committee was concerned about the possible        disadvantages     of
the prospective    reimbursement method, particularly       because
there was no assurance that the changes would result          in the
Government's reimbursing     providers at levels lower, or even
as low as, those which would result     if the present retro-
spective cost-finding     approach was continued.      The Committee
pointed out that a solid foundation     of experience was re-
quired with all possible alternative      forms of reimbursement
before permanent changes were made.

      The December 1970 report of the Senate Finance Commit-
tee (S: Rept, 91-1431) on the Social Security Amendments of
I.970 expressed similar views regarding    experimentation    with
prospective   reimbursement methods.   Although the Senate
passed its version of the bill    on December 29, 1970, it was
not enacted into law before the expiration      of the Ninety-
first  Congress.

      0n January 22, 1971, the Social Security      Amendments of
1971 (H.R. 1) was introduced     in the House of Representatives.
In regard to the subject of authorizing     the Secretary of HEW
to reimburse providers   prospectively   on an experimental    ba-
sis only, House bill 1 was similar     to House bill 17550 which
had been passed by the House of Representatives       in May 1970.

       Pending the legislative approval and implementation     of
the fundamental changes in the methods of reimbursing      hos-
pitals   and ECFs as proposed by the Under Secretary of HEW,
we believe that the existing       settlement   process could be
expedited with resultant      savings in the costs of administer-
ing the Medicare program.       In our opinion,     unless improve-
ments in the several. steps of the settlement          process are
made9 the amount of Medicare payments--amounting            to bi%lions
of dollars --that    have not been afforded an appropriate         final
accounting     can be expected to increase,     and reports to the
agency and congressional      bodies on Medicare reimbursements
to institutions     will not be based on the most current and
accurate data,




                                   83
                                    CHAPTER9

                                 SCOPEOF REVIEW

          Our review was made to determine the causes of delays
    in making final   settlements   of provider    cost reimbursements
    under the Medicare program and included an evaluation         of
    SSA's controls   over the settlement    process under its con-
    tract with BCA, the principal     intermediary     for the Medicare
    program.
n         The work was done at the SSA Central Office in Balti-
    more, Maryland; at BCA in Chicago, Illinois;     and at 13 Blue
    Cross Plans, operating  under subcontracts   with BCA. These
    13 Plans were located in Towson, Maryland; Syracuse and New
    York, New York; Newark, New Jersey; Pittsburgh,     Pennsylva-
    nia; Cleveland and Youngstown, Ohio; Jacksonville,     Florida;
    Dallas, Texas; Milwaukee, Wisconsin; Los Angeles and Oak-
    land, California;  and Chicago.

           We reviewed the basic legislation           establishing     the
    Medicare program and the related regulations               prescribed    by
    the Secretary of HEW for the administration               of this program.
    We also reviewed pertinent           records,  reports,    and documents
    and interviewed    officials       of SSA, BCA, and the intermediaries
    concerning various aspects of the settlement               process,     We
    also examined into the HEWaudit reports pertaining                  to the
    subject of settlements        under the Medicare program.           In addi-
    tion, we interviewed       officials      of audit subcontractors       at
    nine locations    and officials         of 43 hospitals    to ascertain
    their views concerning        the causes of delays in making final
    settlements.

           Our review did not include an evaluation    of the accu-
    racy or reasonableness   of individual settlements    with hos-
    pitals   and ECFs,




                                         84
APPENDIXES




85
                                                                                          APPENDIX I


                                            DEPARTMENT           OF
                                 HEALTH,   EDUCATION,         AND WELFARE
                                                WASHINGTON



    OFFICE
THESECRETARY
             OF                               SEP 28 1970




             Mr. Philip   Charam
             Associate   Director, Civil Division
             United States Generai Accounting     Office
             Washington,    D. C. 29548

             Dear Gr.     SSharai:

             Znclosed are the De?artment's     comments on your draft   report
             entitled,      %engthy Delays In Settling r'or The Costs of Medical
             Services     firnished Under The Kedicare Frograms.iq   We have also
             enclosed a copy of the comments sukmitte$      by the Elue Cross
             Association.

             We appreciate your contributions           toward        im_orovinz   this   aspect
             of Medicare administration.

                                                             Sincereiy       yours,




                                                             Assistant       Secretary,     Comptroller

             Enclosures




                                                   87
                                UNGIHY DdAYS IN Sr;!J?i'LIMG I"OR
                                 THY2 COSTS QF UDICAL SZFNIXS
                           PlJi?NIS~1; -JNXR THZ M;?=I)I';ARE PROGRAM
                       (GA@ Draft   Report Transmitted    June 30, 1970)



Cu.- commcnt6 on the            seven   recommendation   s in GAO’s draft        audit    report
are as follows:

1.    &commendation:       Establish       a definite    timetable    for the develop-
      ment of an effective,        useful,    and timely     provider    reimbursement
      report   or consider    other alternatives,          such-as authorizing
     -intermediaries    to prepare the reports.

Gie continue      to hold the view that SSA should prepare the Provider
Statistical       and 2cimbursement       (PS&A) 3eoort because of the potential
it has for us as a tool for administration                  and appraisal.            In addition,
there are economies to be obtained                by producing      it as a by-product          of
central      data processing     operations       rather  than separately           by each inter-
mediary.        ,%ther than consider       alternative      poss+bilities,          therefore,     we
have decided to concentrate           on actions       to overcome      the problems that
have so far hindered         SSA in producing         an effective,       useful,       and timely
report e Most of these problems are associated                    with bill       processing
rather      than the actual    production       of the provider        charge data.         For
example,       we are experiencing      60 day delay6 in receiving              bills     here at
SSA, We expect to find solutions                to these problem6 and are working
to that end.

The principal        action6  that       have been initiated,       together     with    applicable
timetables,       are as follows:

     a.    A detailed      studyof the provider    charge data developed by
           Minnesota      SueZross is to be conducted,       comparing   this
           data on an item-by-i    tern basis with the data for the same
           period on the PS&R Report.        The purpose will     be to identify
           the differences    In the two reports      and how they came about.
           To the extent   that the study reveals       any deficiencies      in
           SSA’s system for producing       PS&R reports,    we will. determine
           what is needed to correct      them.    t/e aim to complete     our
           study by :<clvemher I .

     b.    Ve expect to establish          a daily    update of the master record
           for #edicare    beneficiaries        in lieu of the present monthly
           update upon availability          of new equipment.        This means that
           as Soon as discrepant         items are corrected       they will  be posted
           to the beneficiary’s        record,     rather   than remaining   on an
           orbit  tape until    the end of the month.

     c.    Two step6 are          being talcen to reduce the number of bills               in
           orbit.   Zirst,         we expect to introduce   shortly, hopefully




                                                88
                                                                          APPENDIX I



          during November     a new form to be used by providers to
          identify  the discharge dates of beneficiaries   whose benefits
          were previously exhausted.    Secondly, we plan to issue within
          a month a cevise.1 POLXNSSA-1885 (Report of Interim Raf~e
          Changes), which will provide for the accurate identification
          of fiscal year ending dates and elicit    prompt reporting  of
          changes of ownership.

     a.
     1    A model electronic      data processing system, called the Part A
          Model System, is being introduced.        This will substantially
          increase the number of intermediaries       submitting billing    data
          on magnetic tape and should cause a dramatic reduction of
          input errors-      At the present time, we are experiencing
          about a 6 percent error rate on paper bills but only about
          0.1 percent error on magnetic       tape. In addition,  magnetic
          tape billing     permits update of records within 48 hours after
          receipt.     This will greatly improve the currency of data
          available for presentation       on the PS&;I Report.
     e.   We are in the process of establishing    controls over rejected
          bills,  i.e., bills returned to intermediaries    for correction.
          We believe those controls will speed up overall processing
          in that we will have a tool for assuring the prompt re-
          submission of bills by the intermediaries.

     f.   We-are initiating  a study at two or three intermediary
          locations of the bill batching and transmission processes
          to determine if processing time can be reduced.    This study
          should be completed before February 1, 1971.

     g.   We   are initiating   a study of PS&R Reports for providers
          served by those intermediaries     which have been submitting
          billing    data on magnetic tape for a year or more. This
          should identify     any problems we may have with capturing
          full information     on a timely basis when data is received
          in this form.

2.   Recommendation: Discontinue or modify the use of the combination
     method of apportioning costs between Medicare and non-Medicare p@t.ieaQ.

As indicated in GAO's draft report,  this recommendation reiterates
proposals that have previously  been made. Since the beginning of the
Medicare program, SSA has been concerned with problems associated with
use of the combination method. In addition,    this matter received
attention   from the DREWAudit Agency (AA) earlier  this year.    In an
audit report issued in February 1370, AA questioned the value of
continued use of the combination method.




                                             89
      i3ased on these     earlier     proposals,   we have been giving       intense study to
      the combination       method as part of our complete          re-examination   of the whole
      area of Medicare cost reimbursement,              We are charged with the responsibility
      of assuring     that the best available         approach is urged to determine        adequately
      the full    reimbursable      cost for service6      provided    Medicare beneficiaries.
      To date, experience         has not demonstrated      that this can be accomplished
      with absolute      precision     under any method,       study hae shown that we may
      achieve our objective         by modifying    the application      of the combination
      method by restricting         its use to certain      types or sizes of facilities.
      We are in the process of reaching            a decision     in this matter.    We will
      advise CiAO when the final          decision  is made.

      Thie recommendation      does not deal with a simple problem in procurement;
      it involves    complex   issues of program policy       and objectives,      The audit
      recommendation     is based mainly     on the finding    headlined    in Chapter 3 of
      the report   a8 ‘%lim.ination     of &estionable      Method of Apportioning     Hospital
      Costs Would peduce Medicare Payments E%yMore Than D.CXI Million               Annu~~lly.~~
      While we do not disagree       with this finding,      we do wamt to emphasize that,
      in itself,   reducing    or minimizing    Medicare payments to hospitals is not
      a legitimate      objective,      This is not a situation          where the Government is
      purchasing    goods or services         for its own use and can therefore               apply the
       classical   objective      of obtaining     the lowest possible       price.       Ilather,    we
      are reimbursing       hospita%s    for services      rendered to third        partieB     under
      a Government insurance program.              ‘In this connection,      our objective         mu&
      be to carry out the mandate of the congress that reimbursement                         be made
      under principles       that “approximate        as closely    a6 practicable        the actual
      co& (both direct        and indirect)      of services     rendered to the beneficiaries
      of the program 80 that under any method of determining                    coat61 the costs
      of services     to individuals       covered by the program will          not be borne by
      individual’s     not covered,      and the costs of service6         of individuals          not
      covered will      not be borne by the program”           (House Report No. i'lg, 89th
      Congresfa, 1st Session,        Page 32) o

      Thuss we continue         to think modification        of the combination method must
      be coordinated       with other possible        changes and considered       in the context
      of the overall.      effect    of the principles       of reimbursement.      The real issue
      is whether or not the overall            rate of payment to hospitals         is reasonable
::i   and whether the eingle           departmental    method of allocatiom       would be fully
      satisfactory.        We share the auditorce         concern that inclusion      of the
      combination     method may cause the principles             to tend toward excess
      reimbursement       of hospitaltz..     At the same time, we mu& be mindful            of
      strong repreeentations          by the hospitaba       that other aspects of the
      existing    principles      have the opposite       tendency.     In the circumstances,
      a deliberate,       considered      and coordinated     approach to modifying      the
      principles     best serves the objectives           of the Hedicare     propam.




                                                      90
                                                                              APPENDIX I

30   Secottxuendation: i3equire intermediaries to provide increased onsite
     assistance to those hospitals which need help in adapting their
     accounting systems to meet Medicare cost reporting   requirements.

We agree with the GAO findings that in the first     year6 of Medicare operations
unsophisticated   and inadequate accounting systems were the cau6e of delay6 in
the submittal of cost reports by hospitals.      However, Medicare is now into
it6 fifth   year of actual operations,   As discussed below, we believe that
virtually   all hospitals have now succeeded - with or without assistance -
in establishing   adequate cost accounting systemc,

Our primary problem had not been one of having the hospitals              adapt their
existing  accounting systems to Medicare reporting. Rather,              we found that
far too many h6d no co&t accounting system at all.

When Medicare wa6 first       instituted,    the ability   of intermediaries     to assist
p&viders   in establishing       adequate accounting record6 wa6 restricted          by the
pressures for getting the program operating and by Limitations               of their own
personnel.    Unfortunately,       there is still   a real. problem in obtaining accounting
personnel to do a fully adequate job in getting the provider audit/cost                   settle-
ment procese current:        However, mo6t intermediaries       did make efforts     to assist
providers in establishing        necessary accounting records.       These were initially
accomplished by conducting training          sessions with the providers'      administrative
and accounting personnel.          The sessions were subsequently followed up with
individual   provider visits       during which more speci,fic recommendation6 were
made. Many intermediaries          then followed up on the implementation of the
recommendation6 through regular visits by their hospital relations                 6taff.
Although some intermediaries    did a far more effective   job than others in
this area, the major obstacle to aCCOmpli6hing results was inaction by
hospitals   in actually setting up the record-keeping    systems recommended.
Early in the program we received indication6     that 6ome intermediaries  may
have offered hospitals actual management and accounting service6 rather than
just advice and assistance,     Further, a number of hospitals were asking for
100 percent reimbursement for the costs of renovating their recordkeeping
systems to accomodate Medicare@s cost accounting needs rather than appor-
tioning the&e costs to all #@lines of business*' as a general and administrative
expense o We denied request6 of this type.

When the first round of hospital audits was conducted, it was found that
many hospitals had not implemented the necessary cost accounting systems
and recommendations.    Consequently, a by-product of the first     round of
audits was the establishment   of necessary  record-keeping systems.      Presently,
about 2/3 of the hO6pital6 have undergone their second audit.        A6 conformity
with Medicare's cost accounting needs is necessary for a proper audit to be
conducted, the audit6 point out inadequacies in the hospital's        cost accounting
systems.

Intermediaries     continue to conduct group training  sessions as pro&ram needs
change, Also,      they are rendering onsite assistance where regular visits by
APPENDIX I


 their  hospital    relations         staff      indicate    it   is needed.        SSA supports        and
 encourages    these activities          a

      4.    Recommendat ion:     Attempt           to-persuade    hospitals     to adopt
            different   cost-reporting             periods    to provide    more even dis-
            tribution   of intermediary             workloads    and to facilitate
            preparation   and/or audits             of cost reports      by accounting   firms,

We do not feel that it is practical             for the Administration          to require
or even indirectly        urge providers     to change their       cost reporting       periods
purely   for the purpose of distributing            intermediary      workloads.      We are
actively    exploring     what we feel to be a more realistic             approach to improv-
ing the workload       situatbon.     We are considering         changes in regulations         to
require   that provider       cost reports     cover the same operatiing          period covered
by the providers’        annual report     to IRS.     Providers    which do not report
annually    to IRS will      continue  to prepare and submit their            cost reports
under present      procedures.

This new procedure            will    provide     a three fold benefit              in the preparation
of cost reports.             First,    as the report           will  be made in conjunction             with
the IRS report,           it will     make the provider’s            job easier.          Since the provider
will    be able to prepare his Medicare cost report                         from the same audit            used
for tax return          purposes,      we believe         that the timely        filing      of cost reports
will    be encouraged.             Secondly,    and more closely          related       to the recommenda-
tion,     implementation          of this procedure            will  make more cost reports             available
for audit at a time when audit                  firms and accountants              would be more available;
that is, after          the “tax season.”            This will       improve handling          of those cases
requiring       audits      by making more manpower available                  at the point where we
have the greatest            workload.       Thirdly,        this procedure will           more evenly
distribute        cost-report        due dates.         If these reports        are filed       timely,      a
better     distribution         of workloads       will      be realized.

We should note here that even if conformity       wdth IRS’ reporting         period may
not change a provider’s     year ending date, it will     affect      the provider’s
reporting  date.   IRS allows   varying reporting   periods      after   the year ending
dates based on type of business.

The following     chart, using a December 31, 1969 year end for both Medicare
and IRS, illustrates     how the proposed poLicy would operate and how it
compares with present     program policy:

   Provider   Form                        IRS                     Due Date of Medicare   Cost Report
-of Organization                         DX                       Proposed Pol icy     Present Policy

Voluntary    nonprofit                   OS/15                            05/15                        03/31
Proprietary
  Sole proprietor                       04/15                             04/15                        03131
  Partnership                           04/15                             a%/15                        03131
  Corporation                           03/15                             03115                        03/31
  Fiduciary                             O4/15                             04/15                        03/31
Governmental                            w--mm                             03131                        03/31




                                                            92
                                                                                           APPENDIX I


As the change will         extend the reporting         period   for many providers,       this
will   give them more f!exibility            in getting     accountant   time for cost report
preparation.        We have reason to believa           that the bulk of the private          non-
profit    hospitals    ar2    concentrated     in the periods       of heaviest  workload.        As
most of the ECF's are prcprietary,               they are more likely       to oparate     on a
fiscal    year basis and profit          from conformity       to IRS' reporting     periods.

In addition,   GAO's concern with the shortage    of auditors      is no longer
serious e Our recent adoption     of the periodic  audit program has vastly
altered   the situation.   We have reduced by two thirds      the number of audited
cost reports    required.  We are now faced with a surplus       of auditor's   time.

While our proposals  are in the early                stages of consideration,             we are hopeful
that we will  be able to move rapidly                in this area.

     5.   Recommendation:       Require the Blue Cross Association       to render more
          assistance    to
                        -. individual   Blue Cross  Plans  in  obtaining    and train-
          staff   needed for making desk reviews     of provider     cost reports.

SSA concurs in this recommendation,                As noted in their     response,    BCA
has already      initiated      actions     to accomplish  this objective     and has had
considerable       success in strengthening          the desk review process       in in-
dividual     Plans.      The fiscal       year 1971 budget provides     over thirteen
and a half million         dollars      to Blue Cross Plans for in-house       staff    for
desk reviews       and field     audits.

SSA is closely         monitoring     intermediaries'      provider reimbursement    and
audit    activity;      with particular       emphasis on assuring     that intermediaries
have sufficient          trained    in-house     staff  to perform desk reviews.       In
November 1969 SSA instituted                a formal   system of in-depth    reviews     of
the reimbursement          and audit area by Bureau of Health Insurance            (BHI)
regional      offices.       These reviews      have been very effective.

     6.    Recommendation:     Require BCA to take a more active      role in making
           final settlements    with providers   at those local   Blue Cross Plans
           where backlogs    of audited  but unsettled   cost reports    are mosb serious,

BCA's role in both its Medicare            and non-Medicare            relations      with the
Plans is not an operating           one; it is essentially             administrative.         Con-
sequently      BCA does not have sufficient            staff     to become directly           involved
in individual      provider    cost settlements.          BCA has, however,            consulted      with
and assisted      Plans in improving       their    performance          in this area.        Further,
since the preparation        by the provider        of the adjusted            cost report      reflecting
audit exceptions       is one of the major causes of delay in accomplishing
settlements,      RCA took the initiative          in instructing           Plans to prepare the
adjusted     cost report    for providers       where the lack of such action                 by the
provider     was delaying     settlement.        In addition,        BCA assisted        in developing
the short cut adjustment           iorm which further         facilitates         the settlement
process.




                                                       93
A new      iliitruitjon          (Ir!terInec!i;          t‘y   Letter    70-29   dated August 1970) has
blew issued pro:yiding     for settling                             more cost reports     without    audits.    AS
a resuit.  trli,? back1 og of unsettled                             cost reports     will be further     reduced.

Because of the critical             need to get current       on the provider       audit-cost
settlement      process,      SSA, in Hovember 1969, establfshed              a formal      system
of in-depth        regions1    office    reviews    of intermediary     audit-settlement
operations       to assure that,        among other things,        the intermediaries          had
sufficient       staff    and administrative        controls   to make prompt settlement
after     completion      of audit.      These activities      of our regional        staff     have
proved productive,           and we now see improvement          in the performance          of
several     Plans whose settlement            process had previously        lagged badly.          We
will    continue      working    through BCA and our regional          offices,     and partic-
ularly     with our onsite         representatives,       to improve the settlement            process
for all providers.

      7.       Recommendation:                Increase           its g~59pyt to encourage intermediaries
               to develop as a minimum                         the capability   for making limited     scope
               field  audits of provider                        cost reports.    [SeeGAOnotel.]

All intermediaries      are now performing     desk reviews with in-house           staff.
Over 40 of the Blue Cross Plans and half of the commercial                 insurance
companies now conduct some field        audits    with their    bwn staff.        Reports
we receive    from intermediaries     on audit activity      show substantially
increased    use of the limited    scope approach.        The following      information
was taken from the June report        of Provider     Audit Activity     and is in-
dicative   of progress     in the past several     months:

                          HOSPITALS - Cumulative                        data     through    June 30,    1970

Cost reporting
period                                              1st yr.                    2nd yr.        3rd yr.      4th       yr.

No. Fields
Audits   Completed                                  6,138                     5,343           3,070            368

% of Limited   Scope
Audits  Performed                                   1.61                       15.91          42.90            54.35

The increased      proportion    of limited     ecope audits    for subsequent     reporting
periods   is what we had expected.           It is attributable      to the improvement
in provider     recordkeeping      systems as a result      of the audits      of earlier
periods   and to the accumulation         by intermediaries      of a data base of pro-
vider cost experience.          The increased     use of the limited      scope audit
approach by intermediaries          is also indicative      of the effectiveness         of the
in-depth    regional     office  reviews    of intermediary     audit activities       initiated
in November 1969.         As mentioned    above, we recently       gave renewed emphasis
to the no audit/limited         scope audit approach through issuance            of Inter-
mediary Letter       70-29 dated August 1970.
                                     [See GAO note 2.1


GAO note

        1. This recommendation         was not made In the final report.           (See p. 70.)

        2. The deleted material pertains to suggested changes or to certain updated statistical           data
            which have been incorporated intc the report.


                                                                         94
                                                                                                                        APPENDIX II




:   840   NORTH     LAKE   SHORE    DPlVE   *   CHlCAGO.   ‘!i~h’OlS   63611    .   ‘3;?’   3;3-c:12F




                                                                                July        14, 1970


                  Mr. James L. Calhoon
                  Deputy Assistant     Bureau Director
                  Bureau of Health Insurance
                  Division   of Intermediary       Operations
                  Social Security     Administration
                  Baltimore,   Maryland      21235

                  Dear Jim:

                  We received your letter           on July 9, 1970, enclosing         a copy
                  of the draft        report    from the General Accounting       Office   on
                  their    study conducted on delays in making final              settlement
                  under the Medicare Program.              The deadline    for submission     of
                  comments by July 15, 1970, did not give us adequate time to
                  review the report          in detail.     We would welcome an opportunity
                  to visit     with the representatives          from the General Accounting
                  Office     to go over the report         in greater   detail.    We would
                  also appreciate         receiving     a copy of your reply to the General
                  Accounting       Office    concerning    the matters   contained     in the
                  draft    report.

                  In the limited  time available     to review the report,     we would
                  at this time limit   our comments to the following       reactions
                  to the recommendations   contained    on pages 68 and 69.

                           1.      We support and underscore      the concern expressed by
                                   the General Accounting    Office   that "Medicare payments
                                   have not been afforded    a proper final     accounting".
                                   This concern takes on added importance        when viewed
                                   within  the framework of the extremely       restricted
                                   audit budget available    for fiscal    year 1971.



                                                                                                        ,j   Serving   the   Nczfisn




                                                                               95
                             -.--
                               7                  July    14, 1970




2    We support the GAO recommendation         that Intermediaries
     provide    increased   onsite assistance      to hospitals    in
     meeting Medicare cost reporting        requirements.       As
     you kn>w, SSA established       very restrictive      guidelines
     concerning     the allowable  time available      to the Inter-
     mediary in working with providers         of care in this
     regard.

3<   We support the recommendation            that BCA extend its
     assistance      to Blue Cross Plans in obtaining           and
     training     staff   needed for the provider         audit activities.
     BCA operates an extensive         search and transfer         program
     through our Human Resources Division.                Extensive
     recruiting      has been conducted by the Blue Cross Associ-
     ation outside the United States and has been most suc-
     cessful    in attracting    qualified       accountants    for posi-
     tions in Blue Cross Plans in the United States.
     Noteworthy      in this regard is the staff          of the Chicago
     Blue Cross Plan largely        recruited      in England.

4.   The recommendation       that BCA take a more active role in
     making final     settlements    with providers     at those Plans
     with significant       backlogs should be viewed in the
     context of the series of significant           steps taken by
     BCA during 1969 to resolve audit backlogs.              Included
     in this action was:

     (a)   direction  to the Plans concerning  penalties                to
           be applied for non-receipt   of cost reports,

     !b)   authority for the Plan to sign           off    a cost     report
           on an appeal basis,

     (c)   development     of a short-cut     adjustment      form,

     (d)   development and auditing         of Government      provider
           cost reports, and

     (e)   program    for handling medical       school     and teaching
           hospital     cost reports.




                                    96
                                                                   APPENDlX II


Mr. James L. Calhoon           -3-                 July 14, 1970



    5.   The recommendation      to increase  the capability
         for making limited      scope field  audits of provider
         cost reports     should be viewed in the context of
         the issuance of BCA Administrative         Bulletin     No. 225
         on August 4, 1969, concerning       a limited      audit scope
         program.     This program was followed      up by a series
         of regional    meetings during the months of October
         and November of 1969.

Thank you for sharing this report with us.             We would again urge
an opportunity       to visit  with representatives     of the General
Accounting     Office   to review their    report   in greater detail. [See   GAOnote]




                                                           ws ki

BRT:moa
cc:  Robert Ouloosian
     James L. Harford


GAO note':     GAO representatives      met with BCA officials
               who suggested several language changes and
               other revisions     which have been incorporated
               into the body of the report.




                                     97
APPENDIX III


                     PRINCIPAL OFFICIALS

                           OF THE

       DEPARTMENTOF HEALTH, EDUCATION, AND WELFARE

     RESPONSIBLEFOR ADMINISTRATION OF THE ACTIVITIES

                  DISCUSSEDIN THIS REPORT


                                            Tenure of office
                                            From            -To
SECRETARYOF HEALTH, EDUCATION,
  AND WELFARE:
    Elliot L. Richardson             June      1970     Present
    Robert H. Finch                  Jan.      1969     June 1970
    Wilbur J. Cohen                  Mar.      1968   .Jan.     1969
    John W. Gardner                  Aug.      1965     Mar. 1968

COMMISSIONEROF SOCIAL SECURITY:
   Robert M. Ball                    Apr.      1962    Present

DIRECTOR, BUREAUOF HEALTH
  INSURANCE(note a>:
    Thomas M. Tierney                Apr*      1967    Present
    Arthur E. Hess                   July      1965    Apr.    1967

aThe Bureau of Health Insurance was a part of the Bureau of
 Disability  and Health Insurance until   September 1965. At
 that time separate bureaus were established    to handle the
 funstions  of the disability  program and the health insur-
 ance program,




                                                       u.s GAO,wash.,D.C.

                              98