Medicare: Control Over Fraud and Abuse Remains Elusive

Published by the Government Accountability Office on 1997-06-26.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Permanent Subcommittee on Investigations,
                          Committee on Governmental Affairs, U.S. Senate

For Release on Delivery
Expected at 9:00 a.m.
Thursday, June 26, 1997

                          Control Over Fraud and
                          Abuse Remains Elusive
                          Statement of Leslie G. Aronovitz, Associate Director
                          Health Financing and Systems Issues
                          Health, Education, and Human Services Division

Medicare: Control Over Fraud and Abuse
Remains Elusive

              Madam Chairman and Members of the Subcommittee:

              We are pleased to be here today as you discuss the problem of fraud and
              abuse in the Medicare program. Because Medicare is one of the largest,
              most expensive programs in the federal budget, its spending has been the
              subject of numerous legislative proposals in recent years by the Congress
              and the administration. In fiscal year 1996, Medicare expenditures totaled
              about $200 billion, and the program’s Hospital Insurance Trust Fund is
              expected to be depleted by 2001. At the same time, millions of dollars are
              being spent inappropriately because of the fraudulent and abusive billing
              practices of health care providers, thus prompting congressional concern
              about program vulnerabilities.

              My comments today will focus on both the fee-for-service and managed
              care programs. Specifically, I would like to highlight the
              anti-fraud-and-abuse tools available to Medicare; the extent to which and
              how effectively they are used by the Health Care Financing Administration
              (HCFA), the agency responsible for administering the program; and recent
              legislative activity aimed at improving program safeguards.

              The information I am presenting today is based on recent GAO studies and
              the three High Risk Series reports on Medicare we have issued since 1992.
              The high-risk reports are the products of GAO’s special effort, begun in 1990
              and supported by the Senate Committee on Governmental Affairs, to
              review federal program areas identified as high risk because of
              vulnerabilities to waste, fraud, abuse, and mismanagement. (See Related
              GAO Products at the end of this statement.)

              In brief, we selected Medicare as one of the initial programs to be included
              in our high-risk efforts because of the program’s size, complexity, and
              rapid growth. In addition, HCFA’s efforts to fight Medicare fraud and abuse
              have not been adequate to prevent substantial losses because the tools
              available over the years have been underutilized or not deployed as
              effectively as possible.

              Because of budget constraints, the number of reviews of claims and
              related medical documentation and the site audits of providers’ records
              have dwindled significantly. This means, for example, that a home health
              provider has only a slim chance of having its claims, its year-end cost
              reports, or its actual provision of services carefully scrutinized by
              Medicare. In addition, HCFA’s management of its claims processing controls
              and Medicare’s automated information systems has been unsatisfactory.

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As a result, Medicare’s information systems and the staff monitoring
claims have been less than effective at spotting indicators of potential
fraud, such as suspiciously large increases in reimbursements, improbable
quantities of services claimed, or duplicate bills submitted to different
contractors for the same service or supply. Because of acknowledged
system weaknesses, HCFA is in the process of acquiring a new
multimillion-dollar automated system called the Medicare Transaction
System (MTS). MTS is intended to replace Medicare’s multiple automated
systems and is expected to enhance significantly its fraud and abuse
detection capabilities. However, HCFA has not effectively managed the
process for acquiring this system. Now schedule delays and growing cost
projections—from a $151 million estimate made in 1992 to about a
$1 billion estimate this year—have forced HCFA to halt much of the
system’s development while the agency reassesses its acquisition plans.

Less than adequate oversight has also resulted in little meaningful action
taken against Medicare health maintenance organizations (HMO) found to
be out of compliance with federal law and regulations. Other than
requiring corrective action plans, HCFA has not sanctioned poor performing
HMOs, using such tools as excluding these HMOs from the program,
prohibiting continued enrollment until deficiencies are corrected, or
notifying beneficiaries of the HMOs cited for violations. Accumulated
evidence of in-home sales abuses coupled with high rates of rapid
disenrollment for certain HMOs also indicate that some beneficiaries are
confused about or are being misled during the enrollment process and are
dissatisfied once they become plan members. In addition, consumer
information that could help beneficiaries distinguish the good plans from
the poor performers is not made publicly available, limiting the ability of
beneficiaries to make informed choices about competing plans. This in
turn limits the ability of consumer choice to drive out poor quality.

Recent and proposed legislation—chiefly the Kassebaum-Kennedy
legislation, also known as the Health Insurance Portability and
Accountability Act of 1996 (HIPAA), and the budget reconciliation
legislation now being considered by the Congress—refocus attention on
various aspects of Medicare fraud and abuse. The implementation of the
enacted provisions, such as additional funding for special antifraud
initiatives and the promise of proposed legislation, such as the authority to
prevent all convicted felons from becoming Medicare providers, offer the
potential to reduce Medicare losses attributable to unwarranted payments.
But HCFA’s history of lengthy delays in implementing legislation gives cause

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                          for concern about whether the authorities granted will be acted on
                          promptly and effectively.

                          Established under the Social Security Amendments of 1965, Medicare is a
Background                two-part program: “hospital insurance,” or part A, which covers inpatient
                          hospital, skilled nursing facility, hospice, and home health care services;
                          and “supplementary medical insurance,” or part B, which covers physician
                          and outpatient hospital services, diagnostic tests, and ambulance and
                          other health services and supplies. Medicare falls under the administrative
                          jurisdiction of HCFA, within the Department of Health and Human Services
                          (HHS). HCFA administers both traditional fee-for-service Medicare and HMOs
                          under contract that are permitted to enroll Medicare beneficiaries.

Fee-for-Service Program   In 1996, Medicare’s fee-for-service program covered almost 90 percent, or
                          35 million, of Medicare’s beneficiaries. Physicians, hospitals, and other
                          providers submit claims to Medicare to receive payment for services they
                          have provided to beneficiaries. HCFA administers Medicare’s fee-for-service
                          program largely through a network of about 70 claims processing
                          contractors, that is, insurance companies—like Blue Cross and Blue Shield
                          plans, Mutual of Omaha, and CIGNA—that process and pay Medicare
                          claims. In fiscal year 1996, contractors processed about 800 million
                          Medicare claims.

                          As Medicare contractors, these companies use federal funds to pay health
                          care providers and beneficiaries and are reimbursed for their
                          administrative costs incurred in performing the work. They are also
                          responsible for the payment safeguard activities intended to protect
                          Medicare from paying inappropriately.1 The contractors have broad
                          discretion in conducting these activities, resulting in significant variations
                          across contractors in implementing payment safeguards.

                          Generally, intermediaries are the contractors that handle claims submitted
                          by “institutional providers” (hospitals, skilled nursing facilities, hospices,
                          and home health agencies); carriers are those handling claims submitted
                          by physicians, laboratories, equipment suppliers, and other practitioners.

                           Although under section 202 of HIPAA, the HHS Secretary is authorized to enter into contracts with
                          entities other than its current contractors to perform payment safeguard activities, HCFA has not yet
                          awarded any contracts of this type.

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Managed Care Program   Medicare’s managed care program covers a growing number of
                       beneficiaries—nearly 5 million at the end of 1996—who have chosen to
                       enroll in an HMO to receive their medical care rather than obtaining
                       services from individual providers. The managed care program, which is
                       funded from both the part A and part B trust funds, consists mostly of risk
                       contract HMOs that enrolled about 4 million Medicare beneficiaries as of
                       the end of 1996.2 These HMOs are paid a monthly amount, fixed in advance,
                       by Medicare for each beneficiary enrolled rather than for each service
                       provided. In this sense, the HMO has a “risk” contract because, regardless
                       of what it spends for each enrollee’s care, the HMO assumes the financial
                       risk of providing all needed health care in return for the payments
                       received. HMOs profit if their costs of providing services are lower than the
                       predetermined payment but lose if their costs are higher than the Medicare

Medicare Fraud         Fraud and abuse encompass a wide range of improper billing practices
                       that include misrepresenting or overcharging with respect to services
                       delivered. Both result in unnecessary costs to Medicare; but a fraud
                       conviction requires proof of intent to defraud. Abuse typically involves
                       actions that are inconsistent with Medicare billing rules and policies. As a
                       practical matter, whether and how a wrongful act is addressed can depend
                       on the size of the financial loss incurred and the quality of the evidence
                       establishing intent. For example, small claims are generally not pursued as
                       fraudulent because of the cost involved in investigation and prosecution.

                       The pursuit of fraud often begins with the contractors, which conduct
                       reviews of submitted claims and respond to beneficiary complaints. They
                       develop cases for referral to the HHS Inspector General for possible
                       criminal or civil prosecution and administrative sanction. Potential fraud
                       cases referred to the Inspector General require careful documentation by
                       the contractor, entailing data analyses, claims audits, interviews with
                       patients, and reviews of medical records.

                       Inspector General investigations can involve, among other things,
                       additional interviews or analyses of medical records, and subpoena of
                       financial records. If satisfied that the evidence warrants prosecution, the
                       Inspector General forwards the case to a U.S. Attorney, within the
                       Department of Justice. The U.S. Attorney then decides whether to accept

                        Other Medicare managed care plans include cost contract HMOs and health care prepayment plans.
                       Cost contract HMOs allow beneficiaries to choose health services from their HMO network or outside
                       providers. Health care prepayment plans cover only part B services. Together, both types of plans
                       enroll fewer than 2 percent of the Medicare population.

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                                           the case for prosecution. If an indictment, and finally, a conviction are
                                           obtained, further work is necessary to establish administrative sanctions
                                           and recover overpayments. Thus, although the mechanics to pursue
                                           Medicare fraud are in place, the high level of resources and interagency
                                           coordination required for case development can stall the pursuit of a case
                                           at many junctures and delay the resolution of a case for many years.

                                           HCFA relies on payment safeguards that consist largely of contractors’
Medicare’s                                 efforts to detect improprieties both before and after claims have been
Anti-Fraud-and-Abuse                       paid. In addition to complaints contractors receive from beneficiaries,
Efforts Consist                            detection efforts include prepayment reviews of providers’ claims, and
                                           postpayment analyses, such as reviews of claims data and audits of
Largely of                                 provider costs. (See table 1.)
Contractors’ Payment

Table 1: Medicare’s Controls to Detect Inappropriate Payments
Control                        How it works
Leads from beneficiaries     Beneficiaries use Explanation of Medicare Benefits to alert Medicare of claims for services not
                             provided, suspiciously high charges, or other indications of potential fraud.
Prepayment review            Computer edits check claims for compliance with such administrative requirements as the submission
                             of all necessary information.

                             Computer edits automatically deny claims that are duplicates of others already processed by that

                             Computer screens suspend for manual review claims that do not appear to comply with medical
                             necessity or coverage criteria.
Postpayment review           Focused medical review. Provider-targeted: Examining historical data, analysts compare providers’
                             claims against those of their peers to identify high billers; past or future claims of high billers may be
                             targeted for more extensive review. Service-targeted: Analysts examine expenditure data to identify
                             medical services for which spending has been unusually high; past or future claims for these services
                             may be subjected to more intensive reviews.

                             Comprehensive claims audit. Reviewers examine in greater depth providers’ billings found through
                             leads from beneficiaries, focused medical review, or other sources to show irregularities.

                             Audit of cost reports. Auditors verify the reasonableness of costs reported annually by institutional
                             providers that are reimbursed on a cost basis.

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Beneficiary Leads        The Explanation of Medicare Benefits (EOMB), which is a notice to
Generated From Payment   beneficiaries detailing the services their provider billed for and Medicare
Notices                  payment decisions, is one type of payment safeguard. Many fraud cases
                         begin with beneficiary calls to Medicare contractors, HCFA, the HHS
                         Inspector General, the Federal Bureau of Investigation, state licensing
                         agencies, and professional associations. These calls, officially termed
                         complaints, are often triggered by EOMBs that show providers’ bills for
                         services never received, items never ordered, or suspiciously high charges
                         for services or supplies received.

Prepayment Claims        One of Medicare’s key payment safeguard activities—performed by the
Screening                claims processing contractors—is the prepayment screening of claims for
                         compliance with administrative billing procedures and medical coverage
                         policies. Edits and screens are programmed into claims processing
                         software that trigger the suspension of incomplete or erroneous claims.
                         For example, if a provider’s billing number or beneficiary identification
                         number is incomplete or otherwise incorrect, the computer automatically
                         holds the claim until the data are corrected. Edits automatically deny
                         duplicate claims. Screens will also halt processing when claims do not
                         meet certain medical necessity or coverage conditions for payment. For
                         example, a screen developed for echocardiography might suspend the
                         processing of a claim for which the documented diagnosis was indigestion;
                         in such a case, the claim would receive further review by contractor staff.

Postpayment Review       Another payment safeguard performed by contractor staff is postpayment
                         review, which consists of efforts to detect irregularities. These efforts
                         include (1) focused medical reviews, in which an examination of claims
                         data focuses on either the billings of a particular provider or the
                         expenditures for a particular service; (2) comprehensive audits of claims
                         submitted by suspect providers; and (3) audits of providers’ cost reports.
                         Postpayment reviews can lead to the strengthening of payment policies
                         that in the future will disallow or reduce unwarranted Medicare
                         reimbursements for certain services.

                         Focused medical reviews involve reviewers examining claims data to find
                         patterns that deviate from a norm. For example, they look for aberrancies
                         in an individual provider’s billing patterns by profiling, or identifying
                         providers who bill for many more services per patient than their peers.
                         Reviewers also look for aberrancies in expenditure data for a specific
                         service or procedure largely by comparing the total amounts the

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contractor spent for a particular service with spending in previous periods
and with other contractors’ spending for that service. The outcome of
focused medical reviews can include more comprehensive reviews, also
called audits, of providers’ claims.

Claims audits are typically conducted for providers whose billings have
shown irregularities. In these cases, contractors review a sample of claims
for the provider’s patients to determine whether services were
appropriate—that is, medically necessary, covered by Medicare, and
actually provided—and whether they were billed in compliance with
Medicare rules. Audits are resource-intensive, often involving medical
record reviews and patient and provider interviews. If audits disclose that
Medicare has paid for unnecessary or inappropriate services, the
contractor attempts to recover overpayments.

Focused medical review also generates the information contractors need
to decide which services need medical review policies, which in turn
typically serve as the basis for developing a computerized medical
necessity screen, as discussed earlier. With the exception of some national
policies, contractors develop their own medical review policies to address
“local” payment issues. For example, after examining several years of data
on spending for foot care services, a contractor determined that total
spending for foot care services increased fourfold—from about $470,000 to
about $1.8 million in a 3-year period. From this and other postpayment
review information, the contractor developed a medical review policy
covering foot care under certain conditions. This policy served as the basis
for the contractor’s development of a computer software screen for foot
care services. Within a year, the contractor’s payments for foot care
procedures dropped to about $620,000, or a third of what had been paid
the previous year.

Audits of cost reports submitted by providers paid under cost-based
reimbursement are another postpayment review tool. Such
providers—including hospital outpatient departments, skilled nursing
facilities, and home health agencies—are reimbursed not on the basis of a
fee schedule or the charge for a service but on the basis of the
“reasonable” cost to provide the service.

Reimbursement to such institutional providers occurs in several steps.
First, Medicare contractors make “interim” payments based on the
provider’s historical costs and current cost estimates. These payments
help defray the ongoing costs of providing services to Medicare

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                      beneficiaries. Second, at the end of each year, the providers submit
                      reports that detail their operating costs throughout the preceding year and
                      specify the share related to the provision of Medicare services. Using this
                      information, intermediaries make interim adjustments to the payments
                      made to the provider. Third, the intermediary can conduct either “desk
                      audits” or more detailed reviews of the cost reports, including “field
                      audits,” to determine the appropriate final payment amounts.

                      Over the last 7 years, HCFA and its claims processing contractors have
Budget Constraints    struggled to carry out critical claims review and provider audit activities
Have Weakened         with a budget that, on a per-claim basis, was declining substantially. For
Efforts to Review     example, between 1989 and 1996, the number of Medicare claims climbed
                      70 percent to over 800 million, while during that same period, claims
Claims, Deter Abuse   review resources grew less than 11 percent. Adjusting for inflation and
                      claims growth, the amount contractors could spend on review shrank from
                      74 cents to 48 cents per claim. (See fig I.1.)

                      The deterioration of Medicare’s controls over home health payments
                      exemplifies the effect of the inadequate funding of payment safeguards.
                      Between 1988 and 1996, Medicare spending for home health care grew
                      from $2.1 billion to $18 billion and by the year 2000 is projected to exceed
                      $21 billion (see fig. I.2). Along with increasing expenditures, the number of
                      home health agencies has also increased—from about 5,800 to over 9,000.

                      However, as we reported in 1996, Medicare’s review of home health claims
                      greatly decreased in the 1990s, despite the dramatic rise in home health
                      care expenditures.3 Because of budgetary constraints in recent years,
                      contractors’ reviews of home health claims plummeted from 62 percent in
                      1987 to a target of 3 percent in 1996.4 The infrequency of the
                      intermediaries’ medical review of claims and limited physician
                      involvement in overseeing home health agencies’ plans of care have made
                      it nearly impossible to determine whether the beneficiary receiving home
                      health services qualified for the benefit, needed the care being delivered,
                      or even received the services being billed to Medicare. Also, because of
                      the small percentage of claims selected for review, home health agencies
                      that billed for noncovered services are much less likely to be identified
                      than was the case a decade earlier.

                      Medicare: Home Health Utilization Expands While Program Controls Deteriorate (GAO/HEHS-96-16,
                      Mar. 27, 1996).
                       Because the 3-percent target applied to all part A claims, the actual proportion of home health claims
                      reviewed, which are a subset of part A claims, could actually be as low as 1 percent.

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    Similarly, the percentage of cost reports audited has declined; between
    1991 and 1996, the chances that any institutional provider’s cost report
    would be subject to a detailed review fell from about 1 in 6 to about 1 in
    13. Because of the time needed to schedule and conduct audits,
    intermediaries can take 2 years or more to reach a final settlement.
    Tentative settlements that differ substantially from the amount ultimately
    determined to be due a provider cause underpayments or excessive
    payments that can remain outstanding for 2 years or more.

    Concern about home health fraud and abuse is not new. Nearly two
    decades ago, HCFA began gathering information that this Subcommittee
    used to launch a review in 1981 of certain home health agencies operating
    in the Chicago metropolitan area. The findings and recommendations of
    the Subcommittee’s 1981 report still resonate today. Among the
    recommendations made in 1981, several are particularly germane in light
    of current anti-fraud-and-abuse legislative activity, namely the
    Kassebaum-Kennedy legislation, and budget reconciliation provisions
    currently being considered by both houses of Congress:

•   The Subcommittee recommended not reducing intermediaries’
    budgets for auditing home health agencies to keep pace with
    program growth. Medicare payment safeguard funding nevertheless did
    decline since 1989 until the passage of the Kassebaum-Kennedy legislation,
    which now ensures stable funding for program safeguards through 2003
    and allows HCFA to count on stable funding in the coming years. However,
    per-claim expenditures for medical review and other controls will remain
    below the 1989 level after adjusting for inflation.
•   The Subcommittee noted that the government had no viable
    mechanism by which it could recoup overpayments. In a report just
    released, we suggested that the Congress consider directing HCFA to start a
    demonstration that would assess home health agencies found to be
    habitual abusive billers for the costs of performing the follow-up audit
    work required to estimate overpayment amounts.5
•   The Subcommittee recommended that, to recoup overpayments,
    HCFA regulations require bonding of new agencies and agencies
    found to be habitual abusers and that HCFA expedite its
    promulgation of these regulations. The regulations, however, were
    never finalized. The budget reconciliation bill proposes that certain
    providers billing Medicare, including home health agencies, post a surety

     See Medicare: Need to Hold Home Health Agencies More Accountable for Inappropriate Billings
    (GAO/HEHS-97-108, June 13, 1997).

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                           bond for at least $50,000. This would make bonding a statutory
                           requirement rather than an option left to HCFA’s discretion.

                           Independent of the question of adequate funding is the issue of whether
Management                 available safeguard dollars are being used as effectively as possible. HCFA
Problems Also Affect       has not taken full advantage of the controls contractors could use to
Payments and               screen for inappropriate claims. Moreover, despite deficiencies that might
                           have been corrected in Medicare’s current claims processing systems, HCFA
Operations                 has concentrated its management efforts on the development of a new

HCFA Has Not Routinely     One chronic problem is that HCFA has not coordinated contractors’
Made Available to          payment safeguard activities. For example, as was planned when the
Contractors Information    program was set up, part B carriers establish their own medical policies
                           and screens, which are the criteria used to identify claims that may not be
on Effective Payment       eligible for payment. Certain policies and the screens used to enforce them
Controls                   have been effective in helping some Medicare carriers avoid making
                           unnecessary or inappropriate payments. However, the potential savings
                           from having these policies and screens used by other carriers have been
                           lost, as HCFA has not adequately coordinated their use among carriers. For
                           example, as we reported in 1996, for just 6 of Medicare’s top 200 most
                           costly services in 1994, the use of certain carriers’ medical policy screens
                           by all of Medicare’s carriers could have saved millions to hundreds of
                           millions of dollars annually.6 However, HCFA has not led in this area and
                           the opportunity to avoid significant Medicare expenditures has been lost.
                           (See fig. I.3.)

Information Management     HCFA’s unsatisfactory management of a major systems acquisition
Problems Slow Efforts to   project—MTS—has serious consequences for the ability of HCFA and its
Uncover Fraud and Abuse    contractors to improve fraud and abuse monitoring activities. Ideally, as
                           we reported in 1994,7 a system like MTS would allow “on-line” claims
                           processing, enabling contractors’ systems to compare claims against other
                           claims already submitted on behalf of the beneficiary, other claims
                           submitted by the provider, and other claims for the same procedure or
                           item. Without this capability, contractors’ processing systems are not

                            Medicare: Millions Can Be Saved by Screening for Overused Services (GAO/HEHS-96-49, Jan. 30,
                            Medicare: New Claims Processing System Benefits and Acquisition Risks (GAO/HEHS/AIMD-94-79,
                           Jan. 25, 1994).

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    programmed to screen for suspiciously large increases in reimbursements
    over a short period or improbable quantities of services claimed for a
    single day of care. The following examples cited in our previous work
    highlight the problem:

•   In the fourth quarter of 1992, a Medicare contractor paid a supplier
    $211,900 for surgical dressing claims. For the same quarter a year later, the
    contractor paid the same supplier more than $6 million without becoming
    suspicious, despite the 2,800-percent increase in the amount paid.
•   A contractor paid claims for a supplier’s body jackets8—with no questions
    asked—that averaged about $2,300 per quarter for five consecutive
    quarters and then jumped to $32,000, $95,000, $235,000, and $889,000 over
    the next four quarters.
•   A contractor reimbursed a clinical psychology group practice for
    individual psychotherapy visits of 45 to 50 minutes. Three psychologists in
    the group were billing for, and allegedly seeing, from 17 to 42 nursing
    facility patients per day. On many days, the leading biller of this group
    would have had to work more than 24 uninterrupted hours to provide the
    services he claimed.
•   A contractor paid a podiatrist $143,580 for performing surgical procedures
    on at least 4,400 nursing facility patients during a 6-month period. For
    these services to be legitimate, the podiatrist would have had to serve at
    least 34 patients a day, 5 days a week.

    In the last two cases cited, the contractors did not become suspicious until
    they received complaints from family members and beneficiaries
    themselves. This failure to discover unusual increases or unusually high
    amounts billed by a particular provider or for a particular service or
    supply item makes Medicare vulnerable to billing schemes.

    MTS  was also expected to, among other things, provide on-line access to
    beneficiary patient histories. Currently, Medicare’s part A and part B
    systems are incompatible, making it difficult to spot schemes that involve
    billing both parts for the same service. Specifically, Medicare’s discrete
    part A and part B processing systems are not designed to easily identify,
    on-line, all of the medical services and devices billed on behalf of an
    individual beneficiary. As a result, providers can improperly bill both parts
    with little danger of detection. In our 1995 review of medical supply
    payments, for example, we noted that the same supply item can be billed
    on behalf of an individual beneficiary to both an intermediary and a

     A body jacket is a custom-fitted spinal brace made of a rigid plastic material that conforms to the
    body and largely immobilizes it.

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carrier.9 We found instances of duplicate payments and noted that
contractors lacked effective tests to determine whether both carriers and
intermediaries paid for the same items. The HHS Inspector General has
reported similar problems with payments for other services, such as
ambulance transportation and diagnostic laboratory tests.10

The promise of MTS, however, could be delayed indefinitely. We recently
reported that, in the 5 years between 1992 and 1997, estimated MTS
development and implementation costs have jumped sevenfold from
$151 million to about $1 billion.11 This is symptomatic of various project
management weaknesses we have previously reported, namely, that HCFA
had not completely defined its requirements 2 years after awarding a
systems development contract; HCFA’s MTS development schedule has had
significant overlap among the various system-development phases,
increasing the risk that incompatibilities and delays will occur; and HCFA
has not adequately managed MTS as an investment as evidenced by the lack
of a satisfactory cost-benefit analysis or consideration of viable
alternatives. After major problems and delays with its MTS development
contract, HCFA announced on April 4, 1997, that it was halting all MTS
fee-for-service software development for 90 days.

As a transitional step to MTS, HCFA has begun consolidating its three
intermediary part A systems and six carrier part B systems into one part A
claims system and one part B claims system. Having a single system for
each part will allow better editing of claims, but it does not provide some
of the benefits that were expected from MTS. Among these are the on-line
capability to identify, before payment is made, whether (1) an item or
service billed to part A has also been billed to part B and vice versa and
(2) a billed item or service is consistent with the other items and services
billed on behalf of an individual. The fate of MTS remains uncertain. HCFA
officials said they would use the 90-day period to examine alternative
methods for achieving their MTS goals.

 Medicare: Excessive Payments for Medical Supplies Continue Despite Improvements
(GAO/HEHS-95-171, Aug. 8, 1995).
 Ambulance Services for Medicare End-Stage Renal Disease Beneficiaries: Medical Necessity,
OEI-03-90-02130 (Washington, D.C.: HHS Office of Inspector General, Aug. 17, 1994); Ambulance
Services for Medicare End-Stage Renal Disease Beneficiaries: Payment Practices, OEI-03-90-02131
(Washington, D.C.: HHS Office of Inspector General, Mar. 9, 1994); and Review of Separately Billable
End-Stage Renal Disease Laboratory Tests, #A-01-96-00513 (Washington, D.C.: HHS Office of Inspector
General, Oct. 1, 1996).
 For a detailed account of MTS costs and development problems, see Medicare Transaction System:
Success Depends Upon Correcting Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78,
May 16, 1997).

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                            Some have argued that moving beneficiaries into managed care—that is,
Ineffective Oversight       into a “claimless” environment—would eliminate problems of fraud and
Leaves Beneficiaries        abuse. Unlike fee-for-service providers, physicians, hospitals, and other
Vulnerable to HMO           providers do not submit a per-service claim for reimbursement. Instead,
                            they are paid by the HMO, which in turn is paid a monthly amount by
Quality Problems            Medicare for each beneficiary enrolled. However, our work shows that
                            another set of problems exists in Medicare’s managed care program,
                            which enrolls more than 10 percent of Medicare’s 39 million beneficiaries
                            and is growing by about 85,000 beneficiaries per month.

                            Under managed care, where fixed monthly payments are made per
                            beneficiary rather than per service, strategies to exploit Medicare are
                            based on the incentive to underserve rather than overserve the
                            beneficiary. Risk contract HMOs, Medicare’s principal managed care option,
                            can offer an attractive alternative to the traditional fee-for-service program
                            because risk HMOs typically cover additional benefits and cost
                            beneficiaries less money. However, in recent years, we have reported that
                            some Medicare HMOs have not complied with federal standards and that
                            HCFA’s monitoring of these HMOs has been weak. For example, in 1995, we
                            reported that, despite efforts to improve its HMO monitoring, HCFA
                            conducted only paper reviews of HMOs’ quality assurance plans, examining
                            only the description rather than the implementation of HMOs’ quality
                            assurance processes.12 Moreover, HCFA was reluctant to take action against
                            noncompliant HMOs, even when there was a history of abusive sales
                            practices, delays in processing beneficiaries’ appeals of HMO decisions to
                            deny coverage, or poor-quality care.

                            In a 1996 report, we discussed the value of releasing HMO performance data
                            to Medicare beneficiaries as having the potential to reduce the occurrence
                            of abusive marketing practices.13 We found that cases developed from
                            beneficiary complaints and other HCFA documentation revealed violations
                            of Medicare regulations prohibiting certain marketing practices, such as
                            activities that mislead, confuse, or misrepresent. Some examples follow:

                        •   At least 20 beneficiaries were inappropriately enrolled in an HMO after
                            attending the same sales seminar in August 1995. The beneficiaries
                            thought they were signing up to receive more information but later
                            discovered the sales agent had enrolled them in the plan.

                             Medicare: Increased HMO Oversight Could Improve Quality and Access to Care (GAO/HEHS-95-155,
                            Aug. 3, 1995).
                             Medicare: HCFA Should Release Data to Aid Consumers, Prompt Better HMO Performance
                            (GAO/HEHS-97-23, Oct. 22, 1996).

                            Page 13                                                                  GAO/T-HEHS-97-165
    Medicare: Control Over Fraud and Abuse
    Remains Elusive

•   In January 1995, a beneficiary was notified by his medical group before an
    appointment that he was now enrolled in another plan. The beneficiary
    had no idea how this could be, as he had not intended to change plans.
    Though the beneficiary signs with an “X,” the new enrollment application
    was signed with a legible cursive signature. HCFA reenrolled the beneficiary
    in his former plan but took no action against the plan or the sales agent.
•   One plan’s marketing activities resulted in enrolling an 81-year-old woman.
    In the first months of membership, she visited her doctor, who was in the
    plan’s provider network. When she later visited a non-network physician
    who had also been one of her regular providers, Medicare denied her
    claims because of her HMO enrollment. She then requested to disenroll and
    told HCFA that if she had understood the requirement to visit specific
    providers, she would not have enrolled in the HMO. HCFA disenrolled her
    from the plan effective with her use of non-network providers.

    Despite many beneficiary complaints, HCFA does not take advantage of
    opportunities to use market forces to prod competitors to offer better
    quality services. HCFA collects, but does not systematically or routinely
    analyze, data on HMO activities that could be used to measure performance.
    Putting these data in the hands of beneficiaries could allow them to
    identify and select plans with better records and give HMOs incentives to
    improve their performance.

    For example, in our 1996 study, we examined HCFA data on HMO
    disenrollments—rates at which Medicare beneficiaries quit their HMOs and
    join other plans or return to fee-for-service Medicare—as an indicator of
    beneficiary satisfaction. In the Miami market, for example, we found that
    in 1995 at one HMO only about 3 of every 25 beneficiaries disenrolled,
    whereas at another HMO more than 3 of every 10 beneficiaries disenrolled.
    We reported that these statistics, particularly in combination with
    complaint data, could help identify HMOs whose sales agents mislead or fail
    to adequately educate new enrollees. (See fig. I.4.)

    In the case of one Florida HMO, for example, HCFA found—in 1991, 1992,
    1994, and 1996—some combination of deficiencies in marketing,
    enrollment, quality assurance systems, grievance and appeals procedures,
    and access to health services. Despite the repeated findings of standards
    violations at this HMO, HCFA’s strongest regulatory action was to require,
    after each inspection, a corrective action plan. HCFA did not provide Miami
    area beneficiaries with information on the inspection findings; at the same
    time, Medicare beneficiaries continued to enroll and disenroll in this plan.

    Page 14                                                    GAO/T-HEHS-97-165
                               Medicare: Control Over Fraud and Abuse
                               Remains Elusive

                               With the passage of the Kassebaum-Kennedy legislation known as HIPAA,
Recent Legislative             the Congress recently provided important new resources and tools to fight
Activity Addresses             health care fraud and abuse. To inform the Congress on the progress of
Aspects of Medicare            HIPAA’s implementation, we have begun monitoring HCFA’s and the HHS
                               Inspector General’s efforts to implement the act. The Congress is currently
Fraud and Abuse                considering additional provisions, as part of the budget reconciliation
                               legislation, to further strengthen fraud reduction efforts.

Legislative Activity Related   HIPAA ensures stable funding and provides for other antifraud efforts, while
to Fee-for-Service Medicare    pending budget reconciliation legislation addresses additional aspects of
                               fraud and abuse.

HIPAA                          A key HIPAA provision ensures stable and gradually increasing funds
                               earmarked for payment safeguard activities. HIPAA provides up to
                               $440 million for program safeguards for this fiscal year, with budget
                               increases scheduled in following years. For the year 2003 and beyond,
                               HIPAA ensures funding of between $710 million and $720 million. However,
                               as we have previously reported, by 2003, per-claim safeguard expenditures
                               will be at about one-half the level of 1989 expenditures, after adjusting for

                               Another HIPAA provision enables HCFA to contract with entities other than
                               the insurers serving as Medicare intermediaries and carriers to conduct
                               payment safeguard activities, including medical and utilization review and
                               audits of cost reports. These contracts, intended to be awarded to entities
                               with relevant expertise, may help improve the oversight of claims payment
                               operations by enhancing data analysis capabilities and avoiding potential
                               conflicts of interest with the contractor’s private business. HCFA does not
                               yet have a target date for awarding program safeguard contracts, nor has it
                               finalized related plans to implement this HIPAA provision.

                               HIPAA also provides funding to HHS and the Department of Justice for
                               combating health care fraud. For fiscal year 1997, the act provides an
                               additional $104 million to these two departments, $70 million of which was
                               specifically allocated to the Office of Inspector General. The remaining
                               $34 million was divided between Justice, which received $24 million, and
                               other HHS agencies, including HCFA, which received $1.8 million of these

                                 High-Risk Series: Medicare (GAO/HR-97-10, Feb. 1997).

                               Page 15                                                     GAO/T-HEHS-97-165
                          Medicare: Control Over Fraud and Abuse
                          Remains Elusive

                          According to HHS Inspector General officials, the Office of Inspector
                          General will use its $70 million to, among other things, hire 250 additional
                          investigators, auditors, lawyers, and other analysts to pursue fraudulent
                          providers. The Office of Inspector General recently published its plan for
                          continuing Operation Restore Trust, an initiative begun in 1995 in response
                          to the rapid growth in Medicare’s spending for home health and nursing
                          home services and medical equipment and supplies. This effort, conducted
                          jointly by HHS and the Department of Justice, operated in five states and
                          reported identifying almost $188 million in inappropriate payments in its 2
                          years of operation. In expanding Operation Restore Trust, the Inspector
                          General has opened new investigative offices in six states this fiscal year.
                          Officials also told us that, depending on its final budget, the office is
                          planning to add another eight offices in fiscal year 1998.

                          According to Department of Justice officials, Justice will use its
                          $24 million to hire 120 new prosecutors who will devote their work
                          exclusively to prosecuting health care fraud. Ninety of the new
                          prosecutors will join U.S. Attorneys’ Offices nationwide. The remaining 30
                          will serve in Justice’s Civil and Criminal Divisions in Washington, D.C. The
                          Department also intends to hire additional support staff, including
                          paralegals, auditors, and other analysts.

                          HIPAA also mandates the creation of a national data collection system
                          reporting final adverse actions against health care providers. The system is
                          intended to enable greater information-sharing among federal and state
                          government agencies and health plans. According to Inspector General
                          officials, the system is not likely to be fully operational for at least another
                          2 years.

Pending Legislation       Earlier we cited provisions in the pending budget reconciliation bill that
                          address concerns about Medicare’s payments for home health services. In
                          addition, the legislation contains various other provisions directed at
                          Medicare fraud and abuse. Among these are the following:

                      •   A requirement to implement consolidated billing for nursing facility stays
                          not covered by the new prospective payment system. Under such an
                          arrangement, the nursing facility would have a greater incentive to
                          monitor the care provided and the charges claimed by outside providers
                          and suppliers. In past reports, we have also suggested consolidated billing
                          for ancillary services provided in skilled nursing facilities.15

                           Fraud and Abuse: Providers Target Medicare Patients in Nursing Facilities (GAO/HEHS-96-18,
                          Jan. 24, 1996).

                          Page 16                                                                     GAO/T-HEHS-97-165
                                   Medicare: Control Over Fraud and Abuse
                                   Remains Elusive

                               •   Authority to refuse to enter into Medicare agreements with individuals or
                                   entities convicted of felonies. This gives the Inspector General the
                                   opportunity to prevent convicted felons from becoming Medicare
                               •   Requirement for providers to furnish key identification numbers. Medicare
                                   providers must furnish HHS with the Social Security and employer
                                   identification numbers for themselves and their owners, individuals with a
                                   controlling interest, and subcontractors in which the provider has an
                                   ownership interest. As we discussed in our March 1997 report on Medicaid
                                   providers, this would allow HCFA to trace problem providers through
                                   related health care organizations and better ensure that excluded
                                   individuals are not paid by the program.16

Legislative Activity Related       A recent legislative proposal, cosponsored by you, Madam Chairman,
to Medicare Managed Care           would help make information about beneficiary satisfaction with Medicare
                                   managed care plans publicly available. Among other things, the bill, S. 302,
                                   would require Medicare HMOs to conduct consumer satisfaction surveys. It
                                   would also authorize grants to states and other organizations to
                                   disseminate information comparing benefits, quality and performance,
                                   cost information, and the results of the satisfaction surveys of Medicare
                                   managed care plans.

                                   Also, HIPAA gives HCFA more flexible sanction authority while providing
                                   HMOs  the statutory right to greater procedural safeguards. In addition to
                                   existing authority to terminate an HMO’s contract if the HMO did not meet
                                   requirements, HCFA now has the option of imposing lesser sanctions, such
                                   as suspending the HMO’s right to enroll Medicare beneficiaries until the
                                   deficiencies are corrected.

                                   Many of Medicare’s vulnerabilities are inherent in its size and mission,
Conclusions                        making it a perpetually attractive target for exploitation. That wrongdoers
                                   continue to find ways to dodge safeguards illustrates the dynamic nature
                                   of fraud and abuse and the need for constant vigilance and increasingly
                                   sophisticated ways to protect against gaming the system. Judicious
                                   changes in Medicare’s day-to-day operations involving HCFA’s improved
                                   oversight and leadership, the mitigation of MTS acquisition risks, and HCFA’s
                                   appropriate application of new anti-fraud-and-abuse funds are necessary
                                   ingredients to reduce substantial future losses. Moreover, as Medicare’s

                                    Medicaid Fraud and Abuse: Stronger Action Needed to Remove Excluded Providers From Federal
                                   Health Programs (GAO/HEHS-97-63, Mar. 31, 1997).

                                   Page 17                                                                  GAO/T-HEHS-97-165
Medicare: Control Over Fraud and Abuse
Remains Elusive

managed care enrollment grows, HCFA must enhance its efforts to see that
beneficiaries receive sufficient information about HMOs to make informed
choices, and that the agency’s authority to enforce HMO compliance with
federal standards is used. To adequately safeguard the Medicare program,
HCFA needs to meet these important challenges promptly.

How HCFA will use the funding and authority provided under HIPAA to
improve its vigilance over Medicare benefit dollars has not yet been
determined. The outcome is largely dependent on how promptly and
effectively HCFA implements the act’s provisions. As we have highlighted
today, weak monitoring, poor coordination, and delays have characterized
HCFA’s past efforts to oversee fee-for-service contractors, the MTS
acquisition process, and Medicare managed care plans. Thus, even with
the promise of HIPAA and the potential enactment of additional legislation,
the prospects for HCFA’s success in combating Medicare fraud and abuse
remain uncertain.

Madam Chairman and Members of the Subcommittee, this concludes my
prepared remarks. I will be happy to answer any questions.

Page 18                                                   GAO/T-HEHS-97-165
Page 19   GAO/T-HEHS-97-165

Additional Data on Medicare Spending and
Program Activities

Figure I.1: Claims Reviews Have Not Matched the Growth in Medicare Claims

                       Percentage of Claims Reviewed Has Dropped From 17% to 9%
Claims (in Millions)

                                                                            790    808



              82         73        75        73          71      72         67     74
             1989        1990      1991      1992       1993     1994       1995   1996

                                             Claims Reviewed

                                           Page 20                                        GAO/T-HEHS-97-165
                                                 Additional Data on Medicare Spending and
                                                 Program Activities

Figure I.2: Rising Costs of Medicare Home Health Benefit

Dollars in Billions


                           Hospital                                     Issuance of
                           Prospective                                  Revised
                           Payment System                               Guidelines

     Act of 1980


 1980     1981    1982   1983   1984   1985   1986    1987   1988    1989    1990     1991   1992   1993   1994     1995   1996

Figure I.3: Many Contractors Do Not
Screen Claims for Costly Services
                                                                        Based on a Review of 17 Contractors in 1994
                                                                                                                           Contractors that have
                                                                                                                           screens for the listed
                                                                                             Medicare payments              medical procedures
                                                     Procedures                                     (in millions)                  (percentage)
                                                     Echocardiography                                        $851                            41%
                                                     Eye exams                                              $686                            35%
                                                     Chest x-rays                                           $507                            35%
                                                     Colonoscopy                                            $478                            35%
                                                     YAG laser surgery                                      $325                            18%
                                                     Duplex scan of extracranial arteries                   $143                            47%

                                                 Page 21                                                                          GAO/T-HEHS-97-165
                                          Additional Data on Medicare Spending and
                                          Program Activities

Figure I.4: Annual Disenrollment in Medicare HMOs in Miami, 1995







Health Options

                 0             10                   20                   30          40
                                    Percentage of Members Disenrolling

                                          Page 22                                         GAO/T-HEHS-97-165
Page 23   GAO/T-HEHS-97-165
Related GAO Products

              Medicare: Need to Hold Home Health Agencies More Accountable for
              Inappropriate Billings (GAO/HEHS-97-108, June 13, 1997).

              Medicare Transaction System: Success Depends Upon Correcting Critical
              Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16, 1997) and
              related testimony entitled Medicare Transaction System: Serious
              Managerial and Technical Weaknesses Threaten Modernization
              (GAO/T-AIMD-97-91, May 16, 1997).

              Nursing Homes: Too Early to Assess New Efforts to Control Fraud and
              Abuse (GAO/HEHS-97-114, Apr. 16, 1997).

              Medicaid Fraud and Abuse: Stronger Action Needed to Remove Excluded
              Providers From Federal Health Programs (GAO/HEHS-97-63, Mar. 31, 1997).

              Medicare (GAO/HR-97-10, Feb. 1997) and related testimony entitled Medicare:
              Inherent Program Risks and Management Challenges Require Continued
              Federal Attention (GAO/T-HEHS-97-89, Mar. 4, 1997).

              Medicare: Home Health Utilization Expands While Program Controls
              Deteriorate (GAO/HEHS-96-16, Mar. 27, 1996).

              Medicare: Millions Can Be Saved by Screening Claims for Overused
              Services (GAO/HEHS-96-49, Jan. 30, 1996).

              Medicare Transaction System: Strengthened Management and Sound
              Development Approach Critical to Success (GAO/T-AIMD-96-12, Nov. 16, 1995).

              Medicare: Allegations Against ABC Home Health Care (GAO/OSI-95-17,
              July 19, 1995).

              Medicare: Commercial Technology Could Save Billions Lost to Billing
              Abuse (GAO/AIMD-95-135, May 5, 1995).

              Medicare Claims (GAO/HR-95-8, Feb. 1995).

              Medicare: New Claims Processing System Benefits and Acquisition Risks
              (GAO/HEHS/AIMD-94-79, Jan. 25, 1994).

              Medicare Claims (GAO/HR-93-6, Dec. 1992).

(101577)      Page 24                                                   GAO/T-HEHS-97-165
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