Medicare: Inherent Program Risks and Management Challenges Require Continued Federal Attention

Published by the Government Accountability Office on 1997-03-04.

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

                          United States General Accounting Office

GAO                       Testimony
                          Before the Subcommittee on Oversight, Committee on
                          Ways and Means, House of Representatives

For Release on Delivery
Expected at 10 a.m.
Tuesday, March 4, 1997

                          Inherent Program Risks and
                          Management Challenges
                          Require Continued Federal
                          Statement of Leslie G. Aronovitz, Associate Director
                          Health Financing and Systems Issues
                          Health, Education, and Human Services Division

Medicare: Inherent Program Risks and
Management Challenges Require Continued
Federal Attention
              Madam Chairman and Members of the Subcommittee:

              We are pleased to be here today to discuss efforts to fight fraud and abuse
              in the Medicare program, one of the largest entitlement programs in the
              federal budget. In fiscal year 1996, federal spending for Medicare was
              $197 billion. Program expenditures have been growing at about 9 percent
              per year. Moreover, the trust fund that pays for hospital and other
              institutional services is projected to be depleted within 5 years. As you
              know, while changes to Medicare are being sought to help control
              program costs, the Congress is concerned that billions of dollars of these
              costs are lost to fraudulent and wasteful claims.

              Today, I would like to address Medicare’s fee-for-service and managed
              care programs. More specifically, with regard to these two programs, I’d
              like to highlight the problems bearing on protecting taxpayer and
              beneficiary interests in Medicare, initiatives recently taken by the
              Congress and federal agencies addressing these problems, and several
              remaining concerns.

              In summary, it is not surprising that because of the program’s size,
              complexity, and rapid growth, Medicare is a charter member of our high
              risk series. (See the list of related GAO products at the end of this
              statement.) In this year’s report on Medicare, we are pleased to note that
              both the Congress and the Health Care Financing Administration (HCFA),
              the Department of Health and Human Services’ (HHS) agency responsible
              for running Medicare, have made important legislative and administrative
              changes addressing chronic payment safeguard problems that we and
              others have identified. However, because of the significant amount of
              money at stake, we believe that the government will need to exercise
              constant vigilance and effective management to keep the program
              protected from financial exploitation.

              In 1996, Medicare’s fee-for-service program covered almost 90 percent, or
Background    33 million, of Medicare’s beneficiaries. Physicians, hospitals, and other
              providers submit claims to Medicare to receive reimbursement. HCFA
              administers Medicare’s fee-for-service program largely through an
              administrative structure of claims processing contractors. In 1965, when
              the Medicare program was enacted, the law called for insurance
              companies—like Blue Cross and Blue Shield, Travelers, and Aetna—to
              process and pay claims because of their expertise in performing these
              functions. As Medicare contractors, these companies use federal funds to

              Page 1                                                     GAO/T-HEHS-97-89
                      Medicare: Inherent Program Risks and
                      Management Challenges Require Continued
                      Federal Attention

                      pay health care providers and beneficiaries and are reimbursed for their
                      administrative expenses incurred in performing the work. Over the years,
                      HCFA has consolidated some of Medicare’s operations, and the number of
                      contractors has fallen from a peak of about 130 to about 70 in 1996.
                      Generally, intermediaries are the contractors that handle part A claims
                      submitted by “institutional providers” (hospitals, skilled nursing facilities,
                      hospices, and home health agencies); carriers are those handling part B
                      claims submitted by physicians, laboratories, equipment suppliers, and
                      other practitioners.

                      HCFA’s efforts to guard against inappropriate payments have been largely
                      contractor-managed operations, leaving the fiscal intermediaries and
                      carriers broad discretion over how to protect Medicare program dollars.
                      As a result, there are significant variations in contractors’ implementation
                      of Medicare’s payment safeguard policies.

                      Medicare’s managed care program covers a growing number of
                      beneficiaries—nearly 5 million in 1996—who have chosen to enroll in a
                      health maintenance organization (HMO) to receive their medical care rather
                      than purchasing 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 and enrolled about 4 million
                      Medicare beneficiaries in 1996.1 The HMOs are paid a monthly amount,
                      fixed in advance, by Medicare for each beneficiary enrolled. 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 health care
                      within a fixed budget. HMOs profit if their cost of providing services is
                      lower than the predetermined payment but lose if their cost is higher than
                      the payment.

                      Over the last 7 years, HCFA and its claims processing contractors have
Recent Funding,       struggled to carry out critical claims review and provider audit activities
Other Initiatives     with a budget that, on a per-claim basis, was seriously declining. For
Revitalize Waning     example, between 1989 and 1996, the number of Medicare claims climbed
                      70 percent to 822 million, while during that same period, claims review
Efforts to Review     resources grew less than 11 percent. Adjusting for inflation and claims
Claims, Deter Abuse   growth, the amount contractors could spend on review shrank from 74
                      cents to 38 cents per claim.

                       Other Medicare HMOs 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 may cover only part B services. Together, both types of plans enroll
                      fewer than 2 percent of the Medicare population.

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                          Medicare: Inherent Program Risks and
                          Management Challenges Require Continued
                          Federal Attention

Implications of Reduced   Consider the effect of inadequate funding on reviewing home health
Funding for Payment       claims. After legislation in 1985 more than doubled claims review funding,
Safeguards                contractors did medical necessity reviews for 62 percent of the home
                          health claims processed in 1986 and 1987. By 1989, however, contractors’
                          claims review target had been lowered to 3.2 percent. One HCFA official
                          noted that home health agencies are aware that their Medicare
                          intermediary reviews only a small number of claims and, therefore, they
                          can take chances billing for noncovered services.

                          The plunge in the number of cost report audits has also weakened
                          Medicare’s efforts to avoid paying excessive costs. Providers subject to
                          these audits are those paid under Medicare’s cost-based reimbursement
                          systems—such as hospital outpatient departments, skilled nursing
                          facilities, and home health agencies. These providers are reimbursed on
                          the basis of the actual costs of providing services, rather than on charges.
                          Each year, cost-based 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, the intermediaries
                          determine how much Medicare should reimburse the provider institutions,
                          some of which have received interim Medicare payments throughout the
                          year based on estimates of expected costs. Without an audit of the
                          provider’s cost report, however, the intermediary can only reconcile the
                          figures provided and cannot determine the appropriateness of the costs
                          reported. In practice, only a fraction of providers is subject to audits.
                          Between 1991 and 1996, the chances, on average, that an institutional
                          provider would be audited fell from about 1 in 6 to about 1 in 13.

The Impact of Recent      With the passage of the Health Insurance Portability and Accountability
Legislation and Other     Act of 1996 (HIPAA), the cycle of declining funding for anti-fraud-and-abuse
Initiatives               activities has been broken. For fiscal year 1997, the act boosts the
                          contractors’ budget for program safeguard activities to 10 percent higher
                          than it was in 1996; by 2003, the level will be 80 percent higher than in
                          1996, after which it remains constant. These additional amounts, however,
                          essentially stabilize per-claim safeguard expenditures at about 1996’s level.
                          For example, we project that payment safeguard spending for 2003 will be
                          just over one-half the level of 1989 spending after adjusting for inflation.

                          In addition to funding, the act has several other provisions to improve
                          vigilance over Medicare benefit dollars, including specifying the flexibility
                          to use contractors other than those processing claims to perform
                          utilization review, provider audit, and other safeguard activities;

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                          Medicare: Inherent Program Risks and
                          Management Challenges Require Continued
                          Federal Attention

                          establishing a program run jointly by the Department of Justice and HHS to
                          coordinate federal, state, and local law enforcement efforts against fraud
                          in Medicare and other health care payers; establishing a national health
                          care fraud data collection program; and enhancing penalties and
                          establishing health care fraud as a separate criminal offense.

                          Another important fraud-fighting effort is the 2-year, multiagency project
                          called Operation Restore Trust. Participating agencies include the HHS
                          Inspector General, HCFA, and the Administration on Aging, as well as the
                          Department of Justice and various state and local agencies. The project
                          targets Medicare abuse and misuse in the areas of home health, nursing
                          homes, and medical equipment and supplies. In its first year, Operation
                          Restore Trust reported recovering $42.3 million in inappropriate
                          payments: $38.6 million were returned to the Medicare trust fund and
                          $3.7 million to the Treasury as a result of these efforts. It also resulted in
                          46 convictions, imposed 42 fines, and excluded 119 fraudulent providers
                          from program participation. In addition, many of the targeted home health
                          agencies were decertified. Operation Restore Trust is scheduled to be
                          closed out as a demonstration project in May 1997. This effort, as well as
                          HCFA’s progress in adopting fraud and abuse detection software and its
                          development of a national provider tracking system, is discussed further in
                          our high risk report.

Management Problems       Notwithstanding funding increases, several problems independent of
Also Affect Medicare      adequate funding and related to HCFA’s oversight of Medicare have
Payments and Operations   implications for curbing unnecessary spending and conducting program
                          operations effectively. One chronic problem is that HCFA has not
                          coordinated contractors’ payment safeguard activities. For example, as
                          was anticipated when the 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 eligible for payment. Certain policies and
                          the screens used to enforce them have been highly effective in helping
                          some Medicare carriers avoid making unnecessary or inappropriate
                          payments. However, the potential savings from having these policies and
                          screens used by all carriers have been lost, as HCFA has not adequately
                          coordinated their use among carriers. For example, for just six 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 in
                          the millions to hundreds of millions of dollars annually. However, HCFA’s
                          leadership has been absent in this area, resulting in the loss of opportunity
                          to avoid significant Medicare expenditures.

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                       Medicare: Inherent Program Risks and
                       Management Challenges Require Continued
                       Federal Attention

                       In addition, several technical and management problems have hampered
                       HCFA’s acquisition of the Medicare Transaction System (MTS), a major
                       claims processing system that aims at consolidating the nine different
                       claims processing systems Medicare currently uses. First, HCFA had not
                       completely defined its requirements 2 years after awarding a systems
                       development contract. Second, HCFA’s MTS development schedule has had
                       significant overlap among the various system-development phases,
                       increasing the risk that incompatibilities and delays will occur. Finally,
                       HCFA has conducted the MTS project without adequate information about
                       the system’s costs and benefits.

                       Before MTS is completed, HCFA must oversee several essential information
                       management transitions in the Medicare claims processing environment.
                       One involves the shifting of claims processing workloads from contractors
                       who leave the program to other remaining contractors. Similar workload
                       shifts in the past have produced serious disruptions in processing claims
                       promptly and accurately, delays in paying physicians, and the mishandling
                       of some payment controls. A second issue involves HCFA’s plan to
                       consolidate Medicare’s three part A and six part B systems into a single
                       system for each part. This plan will require several major software
                       conversions. A third issue involves the “millennium” problem—revising
                       computerized systems to accommodate the year-digit change to 2000. HCFA
                       does not yet have plans for monitoring contractors’ progress in making
                       their systems “millennium compliant.”

                       Risk contract HMOs, Medicare’s principal managed care option, bear their
Medicare Managed       own set of risks for taxpayers and beneficiaries. These plans currently
Care Incurs Separate   enroll about 10 percent of Medicare’s population and have shown rapid
Risks                  enrollment growth in recent years. Because HMOs have helped private
                       sector payers contain health care costs and limit the excess utilization
                       encouraged by fee-for-service reimbursement, these HMOs have
                       cost-control appeal for Medicare, while offering potential advantages to

                       However, as we recently testified, a methodological flaw in HCFA’s
                       approach to paying HMOs has produced excess payments for some plans.
                       Moreover, because higher HMO enrollment produces higher excess
                       payments, enrolling more beneficiaries in managed care could increase
                       rather than lower Medicare spending unless the method of setting HMO
                       rates is revised.

                       Page 5                                                     GAO/T-HEHS-97-89
                          Medicare: Inherent Program Risks and
                          Management Challenges Require Continued
                          Federal Attention

                          A second problem, of particular concern to beneficiaries, is that HCFA has
                          been lax in enforcing HMO compliance with program standards, while not
                          keeping beneficiaries adequately informed of the benefits, costs, and
                          performance of competing HMOs. 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. Moreover, the
                          agency 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 patterns of
                          poor quality care.

                          HCFA also misses the opportunity to supplement its HMO regulatory efforts
                          by not keeping the Medicare beneficiary population well-informed about
                          competing HMOs. As we reported in 1996, HCFA has a wealth of data,
                          collected for program administration and contract oversight purposes, that
                          it does not package or disseminate for consumer use. For example, HCFA
                          does not provide beneficiaries with any of the comparative consumer
                          guides that the federal government and other employer-based health
                          insurance programs routinely distribute to their employees and retirees.
                          Instead, HCFA collects information only for its internal use—records of
                          each HMO’s premium requirements and benefit offerings, enrollment and
                          disenrollment data (monthly reports specifying for each HMO the number
                          of beneficiaries that joined and left that month), records of enrollees’
                          complaints, and results of certification visits to HMOs. By not publishing
                          disenrollment rates or other comparative performance measures, HCFA
                          misses an opportunity to show beneficiaries which plans have a good
                          record and hinders HMOs’ efforts to benchmark their own performance.

Initiatives Intended to   HCFA acknowledges the problems we identified in Medicare’s risk contract
Address Risk Contract     program. To tackle the difficulties in setting HMO payment rates, HCFA has
Program Problems          been conducting several demonstration projects that examine ways to
                          modify or replace the current method of determining HMO payment rates.
                          In addition, HIPAA gives HCFA more flexible sanction authority, such as
                          suspending an HMO’s right to enroll Medicare beneficiaries until
                          deficiencies are corrected, while providing HMOs the statutory right to
                          develop and implement a corrective action plan before HCFA imposes a

                          Finally, HCFA is developing several consumer information efforts, including
                          plans to make HMO comparison charts available on the Internet. Providing

                          Page 6                                                     GAO/T-HEHS-97-89
             Medicare: Inherent Program Risks and
             Management Challenges Require Continued
             Federal Attention

             the information in an electronic format rather than in print, however, may
             make it less accessible to the very individuals who would find it useful.
             The information, according to HCFA, will have to be “downloaded and
             customized for local consumption.” HCFA expects the primary users of this
             information to be beneficiary advocates and Medicare insurance
             counselors. HCFA is also planning a survey to obtain beneficiaries’
             perceptions of their managed care plans and does not expect preliminary
             results before the end of 1997. In another key initiative, HCFA is helping to
             develop a new version of the Health Plan Employer Data and Information
             Set (HEDIS 3.0) that will incorporate measures relevant to the elderly
             population. The measures will enable comparisons to be made among
             plans of the enrollees’ use of such prevention and screening services as flu
             shots, mammography, and eye exams for diabetics. As of January 1997,
             Medicare HMOs are required, from the time they renew their contract, to
             report on HEDIS 3.0 clinical effectiveness measures. HCFA intends to
             summarize the results and include them in comparability charts currently
             being developed.

             Many of Medicare’s vulnerabilities are inherent in its size and mission,
Conclusion   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, its appropriate application of new
             anti-fraud-and-abuse funds, and the mitigation of MTS acquisition risks are
             necessary ingredients to reduce substantial future losses. Moreover, as
             Medicare’s managed care enrollment grows, HCFA must work to ensure
             that payments to HMOs better reflect the cost of beneficiaries’ care, that
             beneficiaries receive information about HMOs sufficient to make informed
             choices, and that the agency’s expanded authority to enforce HMO
             compliance with federal standards is used. To adequately safeguard the
             Medicare program, HCFA needs to meet these important challenges

             Page 7                                                       GAO/T-HEHS-97-89
               Medicare: Inherent Program Risks and
               Management Challenges Require Continued
               Federal Attention

               This concludes my statement. I am happy to take your questions.

               For more information on this testimony, please call Donald C. Snyder,
Contributors   Assistant Director, on (202) 512-7204. Other major contributors to this
               statement included Thomas Dowdal and Hannah F. Fein.

               Page 8                                                     GAO/T-HEHS-97-89
Medicare: Inherent Program Risks and
Management Challenges Require Continued
Federal Attention

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Medicare: Inherent Program Risks and
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Page 11   GAO/T-HEHS-97-89
Related GAO Products

                      Medicare (GAO/HR-97-10).
High Risk Series
Reports on Medicare   Medicare Claims (GAO/HR-95-8).

                      Medicare Claims (GAO/HR-93-6).

                      Medicare: Home Health Utilization Expands While Program Controls
Medicare              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: New Claims Processing System Benefits and Acquisition Risks
                      (GAO/HEHS/AIMD-94-79, Jan. 25, 1994).

                      Medicare HMOs: HCFA Could Promptly Reduce Excess Payments by
Medicare Managed      Improving Accuracy of County Payment Rates (GAO/T-HEHS-97-78, Feb. 25,
Care                  1997).

                      Medicare: HCFA Should Release Data to Aid Consumers, Prompt Better HMO
                      Performance (GAO/HEHS-97-23, Oct. 22, 1996).

(101543)              Page 12                                                    GAO/T-HEHS-97-89
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