Defense Health Care: DOD Needs to Improve Its Monitoring of Claims Processing Activities

Published by the Government Accountability Office on 1999-03-10.

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

                            United States General Accounting Office

GAO                         Testimony
                            Before the Subcommittee on Military Personnel,
                            Committee on Armed Services, House of Representatives

For Release on Delivery
Expected at 1:00 p.m.
Wednesday, March 10, 1999
                            DEFENSE HEALTH CARE

                            DOD Needs to Improve Its
                            Monitoring of Claims
                            Processing Activities
                            Statement of Stephen P. Backhus, Director
                            Veterans' Affairs and Military Health Care Issues
                            Health, Education, and Human Services Division

Defense Health Care: DOD Needs to Improve
Its Monitoring of Claims Processing Activities

               Mr. Chairman and Members of the Subcommittee:

               We are pleased to be here today to discuss issues and problems we have
               identified relating to our ongoing assessment of health care claims
               processing for the Department of Defense’s (DOD) TRICARE program.
               TRICARE is a nationwide managed health care program and represents a
               redesign of DOD’s $15.6 billion per year health care system.1 DOD has
               contracted with private sector health care companies, who are referred to
               as managed care support contractors, to administer the program on a
               regional basis. Contractors’ responsibilities include developing networks
               of civilian providers, arranging care for beneficiaries, providing customer
               service, and processing claims. During 1998, contractors processed about
               28 million health care claims, including those submitted under DOD’s
               former fee-for-service program.

               Last year, we reported on providers’ concerns about TRICARE
               reimbursement rates and slow and cumbersome claims payment.2
               Contractors acknowledged that during the start-up phase of health care
               delivery they experienced some problems processing claims in a timely
               manner, primarily because claims volume was higher than expected.
               However, even when contractors became more timely, providers continued
               to complain about slow payment and expressed confusion about claims
               adjudication. In response to this Subcommittee’s concerns about these
               complaints, we are evaluating the performance of DOD’s contractors in
               processing TRICARE claims.

               My statement today will highlight our preliminary findings on claims
               processing timeliness and accuracy as well as the effectiveness of a
               commercially available software program to edit TRICARE claims. The
               information we present is based on an ongoing evaluation of the claims
               processing performance of TRICARE regions that were in operation for at
               least 1 year as of July 1998. (See appendix I.) During the course of our
               work, we met with officials of DOD and its contractors and toured their
               claims processing facilities. We also spoke with representatives of
               physicians’ groups and with officials of the company responsible for
               developing and distributing the claims editing software that DOD uses. In

               1DOD previously provided health care under the Civilian Health and Medical Program of the Uniformed
               Services, a fee-for-service program

                Defense Health Care: Reimbursement Rates Appropriately Set; Other Problems Concern Physicians
               (GAO/HEHS-98-80, Feb. 26, 1998).

               Page 1                                                                        GAO/T-HEHS-99-78
             Defense Health Care: DOD Needs to Improve
             Its Monitoring of Claims Processing

             addition, we obtained and analyzed nearly 20 million completed claims to
             determine whether they were processed in a timely manner. We reviewed
             DOD’s efforts to assess accuracy but did not independently audit claims for
             accuracy. We expect to issue a report in the near future.

             In summary, our work to date for the 1-year period included in our review
             has shown that TRICARE’s contractors in 8 of the 11 regions processed
             86 percent (or 16 million) of the claims on time overall, exceeding DOD’s
             timeliness standard of processing 75 percent of claims within 21 days.
             However, only 66 percent of hospital or institutional claims were processed
             on time, while 97 percent of pharmacy claims were processed on time, and
             81 percent of professional claims were processed on time. The nearly
             3 million claims that did not meet the timeliness standards were mostly
             from physicians and other providers. Moreover, DOD does not know
             whether contractors are paying claims accurately because fewer than half
             of the claims are subject to the audit, and the methodology used to
             calculate payment error is statistically unsound. According to contractors,
             the principal reasons for claims processing problems are the complexity of
             the TRICARE program and frequent program changes, requiring
             modifications to claims processing software and procedures. Specifically,
             at the time of our review, DOD had instructed contractors to implement
             about 650 changes, or about 130 changes on average for each contract.

             DOD’s claims editing software, designed to ensure that providers are
             accurately reimbursed for services, affected 3.5 percent of claims and
             saved more than $53 million in fiscal year 1998. We found, however, that
             inappropriate denials were sometimes made because DOD’s software did
             not always comply with industry standards. This resulted from DOD’s poor
             communication and slowness to make program changes that affected
             editing outcomes. In addition, providers were frustrated because they
             mistakenly believed that they had no recourse for claims denied by the
             editing software. If not resolved, these kinds of problems as well as the
             volume of claims processed late, despite meeting the timeliness standard
             overall, could cause problems in attracting the number of civilian providers
             necessary to ensure that beneficiaries have adequate access to health care.

Background   DOD’s primary medical mission is to maintain the health of 1.6 million
             active duty service personnel and to provide health care for them during
             military operations. DOD additionally offers health care to 6.6 million
             nonactive duty beneficiaries, including dependents of active duty
             personnel, military retirees, and dependents of retirees. Most health care is

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Defense Health Care: DOD Needs to Improve
Its Monitoring of Claims Processing

provided in military-operated hospitals and clinics worldwide and is
supplemented by care provided by civilian providers under TRICARE.
TRICARE is a triple-option benefit program designed to give beneficiaries a
choice among a health maintenance organization, a preferred provider
organization, and a fee-for-service benefit. The health maintenance
organization option, called TRICARE Prime, is the only option for which
beneficiaries must enroll. TRICARE Extra is the preferred provider
organization option, and TRICARE Standard is the fee-for-service option.

TRICARE is geographically organized into 11 health care regions that are
administered by five contractors. Among the contractors’ many
responsibilities are claims processing, for which all have subcontracted
with one of two companies. DOD requires contractors to meet specific
timeliness and accuracy standards when processing claims. The tasks
required to process claims include claims receipt, data entry, claims
adjudication, and claims payment or denial. Contractors must process
75 percent of claims within 21 days to meet DOD’s timeliness standard.
This standard applies to all claims, even those that need additional
information to be processed. By way of comparison, Medicare requires
that 95 percent of complete electronic claims be paid in 14 days and that
95 percent of complete paper claims be paid in 30 days. DOD also requires
contractors to maintain a 98-percent payment accuracy rate. Medicare has
a goal of 90-percent accuracy for the next 5 years. The timeliness and
accuracy standards of private plans vary.

DOD verifies timeliness standards but relies upon external audits for
accuracy verification. DOD uses information from its electronic health
care service record (HCSR) database to verify timeliness. Contractors
prepare and submit to DOD a HCSR for every claim processed to
completion. To verify whether contractors’ accuracy standards are being
met, DOD monitors a sample of processed claims through a quarterly
external audit with two components—payment accuracy and data input

DOD requires contractors to use ClaimCheck, a commercial off-the-shelf
software program that performs a prepayment review of claims and helps
prevent overpayments by analyzing the appropriateness of billing on
professional claims. The basic ClaimCheck software package contains
approximately five million edits. However, companies that purchase
ClaimCheck may customize the edits to reflect their plans’ benefit
structure. DOD purchased ClaimCheck software in March 1994 and had it

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                            Defense Health Care: DOD Needs to Improve
                            Its Monitoring of Claims Processing

                            customized for TRICARE. DOD refers to its customized version as
                            TRICARE ClaimCheck.

Concerns Exist About        Our analysis to date has shown that TRICARE’s contractors met DOD’s
                            timeliness standards by paying more than 16 million claims within 21 days.3
Claims Processing           Even so, nearly three million claims were paid late. We found differences
Timeliness                  in timeliness by category, which includes pharmacy, hospital or
                            institutional, and professional claims. For example, contractors did not
                            meet the standard for hospital or institutional claims. Nonetheless, they
                            were still able to meet DOD’s standard overall, primarily because pharmacy
                            claims were paid faster. DOD has proposed several initiatives to improve
                            claims processing timeliness, including the adoption of some Medicare

Timeliness Standards Were   As table 1 shows, the three contractors responsible for 8 of the 11
Met Overall, but Some       TRICARE regions met DOD’s contractual timeliness standards of
                            processing 75 percent of claims within 21 days. In fact, between July 1997
Impediments Exist
                            and June 1998, these contractors exceeded the standard by processing
                            86 percent of claims on time. However, nearly three million claims did not
                            meet the timeliness standard, and of these claims, more than 80 percent
                            were from physicians and other professional providers. Furthermore, only
                            66 percent of claims from hospitals and other institutions were processed
                            within 21 days. Hospital claims take longer to process for many reasons
                            such as their higher cost, numerous line items, and the need for review by a
                            medical professional. In contrast, 97 percent of pharmacy claims met the
                            standard. Pharmacy claims were processed more quickly because they are
                            usually simple claims and 90 percent are submitted electronically, which is

                              Includes claims from Foundation Health Federal Services, Inc.; Humana Military Healthcare Services,
                            Inc.; and TriWest Healthcare Alliance, Inc.; but not from Anthem Alliance for Health, Inc., or Sierra
                            Military Health Services.

                            Page 4                                                                          GAO/T-HEHS-99-78
                             Defense Health Care: DOD Needs to Improve
                             Its Monitoring of Claims Processing

                             Table 1: Processing Time for Claims Processed Between July 1, 1997, and June 30,

                                                                         Claims processed
                                                     0–21 days                More than 21 days
                             Category of
                             claims                 Number       Percent       Number       Percent      All claims
                             Pharmacy              6,506,867             97     215,252            3     6,722,119
                             Hospital or
                             institutional          473,964              66     243,382           34       717,346
                             Professional          9,480,983             81   2,265,093           19    11,746,076
                             All claims          16,461,814              86   2,723,727           14    19,185,541

Planned Efforts to Improve   Through discussions with contractors, DOD has identified changes that
Timeliness                   could improve claims processing timeliness as well as other aspects of the
                             program. One of these proposed changes will eliminate unnecessarily
                             prescriptive requirements for assessing the medical necessity of care that
                             has been provided and will allow contractors to select and use a nationally
                             accepted criterion for assessing necessity. The current adjudication
                             process is slowed because contractors must review and follow extensive
                             criteria to determine whether payment should be allowed. A second
                             change will adopt Medicare’s timeliness standards, which differentiate
                             between paper and electronic claims and require contractors to pay
                             interest on late claims. Medicare requires that 95 percent of complete
                             electronic claims be paid in 14 days and that 95 percent of complete paper
                             claims be paid in 30 days. Another change will adopt Medicare’s practice of
                             returning incomplete claims. By adopting Medicare’s standards and
                             practices, DOD will be mirroring a program that is more familiar to
                             providers. These initiatives should help improve the completeness of
                             claims initially received as well as provide incentives for contractors to
                             process claims in a timely way. In addition, they should increase the
                             submission of electronic claims, which are paid faster and are cheaper to

                             Another impending change that should increase electronic claims
                             submissions is the administrative simplification requirement of the Health
                             Insurance Portability and Accountability Act of 1996 (P.L. 104-191). The act
                             requires the industrywide adoption of uniform standards for electronic
                             transactions, including filing claims. The timetable to adopt standards has
                             slipped because of the large number of comments received in response to

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                               Defense Health Care: DOD Needs to Improve
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                               the proposed regulations implementing the act and industry preoccupation
                               with identifying and resolving year 2000 computer issues. However, this
                               effort should be under way in middle to late 1999.

Claims Processing              DOD does not know whether contractors are meeting contractual
                               requirements for claims processing payment accuracy because its primary
Accuracy Is Unknown;           assessment tool uses a statistically unsound methodology. Furthermore,
Program Complexity             several factors, including TRICARE’s complex program structure and
                               continual program changes, add to the difficulty of accurately processing
Affects Processing             claims.

Audit Methodology Does         DOD uses external audits to assess the contractors’ compliance with
Not Adequately Measure         payment accuracy standards by sampling processed claims and calculating
                               the percentage of dollars paid in error. However, the method for these
Payment Accuracy
                               audits is statistically unsound because it does not accurately represent the
                               amount of overpayment and underpayment for two reasons. First, the
                               sample excludes all claims under $100; consequently, only about 40 percent
                               of processed claims are subject to the audit for payment accuracy. Second,
                               the magnitude of inaccurate payment is calculated in such a way that the
                               computed error rate is not representative of all claims subject to audit in a
                               given period. Therefore, the calculated error rate is not an accurate
                               indicator of the overall payment processing accuracy. We applied
                               appropriate statistical methods to the same data DOD used in its quarterly
                               audit reports and recomputed error rates. Rates were generally higher, in
                               one instance increasing from 5.5 percent to 10.5 percent.

                               In addition, DOD’s method for calculating payment accuracy does not give
                               a complete picture of payment accuracy. For example, another useful
                               measure would be to calculate the number of claims processed accurately
                               as a percentage of the total number of claims processed. When accuracy is
                               calculated using this method, error rates for some of the contract periods
                               we examined were as high as 25 percent.

TRICARE’s Complexity and       Contractors told us that, of the many programs they administer—including
Frequent Changes Add to        Medicare and other private plans—TRICARE is the most complicated and
                               unique, contributing to claims processing difficulties. The following
the Difficulty of Accurately
                               features contribute to TRICARE’s complexity.
Processing Claims

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Defense Health Care: DOD Needs to Improve
Its Monitoring of Claims Processing

• Each of TRICARE’s three options has a different array of benefits,
  copayments, and deductibles. Claims require different adjudication
  procedures, depending on which option is involved, and, even within
  each option, different claims processing rules apply.
• For the Prime and Extra options, provider reimbursement information is
  difficult to keep accurate because payment agreements are complicated
  and individual providers may belong to multiple practices with different
• Claims submitted under the Standard option are also confusing to
  process because providers under this option can either accept TRICARE
  payment in full or charge up to an additional 15 percent on a claim-by-
  claim basis.
• TRICARE is always the final payer when other health insurance is
  involved. Thus, contractors must understand the requirements of many
  other programs’ benefit structures and obtain reimbursement
  information before a claim can be processed to completion.
• For each claim, contractors must connect with and rely on selected
  DOD databases to determine eligibility, deductibles, and enrollment.
  Contractors stated that this requirement complicates claims processing
  and increases the opportunity for errors. In contrast, most insurers
  maintain these data internally.

Further compounding claims processing complexity are TRICARE’s
frequent program changes, which usually require contract modifications.
At the time of our review, DOD had instructed the contractors we reviewed
to implement about 650 contract modifications—an average of about
130 per contract since the beginning of the program. According to the
contractors, their ability to process claims accurately is impeded because
some changes require system reprogramming and testing as well as staff
retraining. In the future, DOD hopes to resolve some of these problems by
consolidating changes and providing longer notification periods.

Providers and beneficiaries also contribute to problems with claims
processing accuracy because they sometimes submit claims with
inaccurate information. Subsequently, when the errors are identified, the
claim must be resubmitted and reprocessed. The contractors told us that
because TRICARE is usually a small percentage of most providers’
practices, they have little incentive to educate themselves on the complex
and frequently changing requirements.

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                      Defense Health Care: DOD Needs to Improve
                      Its Monitoring of Claims Processing

DOD Management        DOD’s commercial claims editing software, ClaimCheck, is designed to
                      ensure that providers are accurately reimbursed for the services they
Problems Impede the   provide. During fiscal year 1998, ClaimCheck saved more than $53 million
Effectiveness of      and affected 3.5 percent of claims. ClaimCheck is a key player in the claims
                      editing software industry, with more than 200 customers nationwide,
ClaimCheck            including more than 60 percent of Blue Cross Blue Shield carriers and the
                      Department of Veterans’ Affairs. In October 1998, the Health Care
                      Financing Administration started using ClaimCheck to prevent
                      overpayments in the Medicare program. However, despite its general
                      acceptance in the insurance industry, providers have expressed concerns
                      about the accuracy of some ClaimCheck decisions because some
                      information is not shared with them. Some of these concerns seem
                      appropriate because of DOD delays in initiating policy changes that affect
                      the software.

                      For example, providers expressed concerns about ClaimCheck because its
                      edits are not published and available to them. Therefore, they cannot be
                      assured that it follows the American Medical Association’s (AMA) medical
                      procedure coding guidance, the industry standard. According to DOD
                      officials, TRICARE claims will be paid appropriately if providers follow
                      AMA’s guidelines because ClaimCheck’s edits are based upon industry
                      standards. However, we identified a few instances in which DOD’s version
                      of ClaimCheck did not comply with industry standards because DOD was
                      slow to implement policy changes that affected the software’s outcomes.
                      The denial of surgical pathology payments to dermatologists provides an
                      excellent example.4 In April 1996—early into the implementation of
                      ClaimCheck—DOD officials realized that the software did not recognize
                      physicians by specialty. As a result, it was not able to identify
                      dermatologists who, unlike other physicians, should be paid for surgical
                      pathology procedures. While this is a limitation of ClaimCheck, it could
                      have been readily resolved through a modification of the contractors’
                      claims processing systems. However, DOD waited almost 2 years before
                      providing contractors with the contract modification directing them to
                      make this change. One contractor stated that it lost dermatologists from its
                      network solely because DOD did not react quickly to this needed

                          Surgical pathology is the microscopic examination of sampled tissue.

                      Page 8                                                                     GAO/T-HEHS-99-78
              Defense Health Care: DOD Needs to Improve
              Its Monitoring of Claims Processing

              In another instance, providers were upset because they mistakenly
              believed that they could not obtain explanations for edits that affected their
              claims. In order to maintain its competitive edge over other vendors,
              ClaimCheck’s programming is not shared with the public or even its
              purchasers. But the distributors of ClaimCheck stated that their product is
              not a mysterious “black box” because they provide narrative explanations
              to purchasers on how every edit works. DOD officials acknowledged that
              they were aware of contractors’ misconception that the edits are
              proprietary and cannot be shared and added that providers can request and
              receive information on specific edits.

              Finally, providers’ frustrations are compounded by poor communication by
              DOD and its contractors regarding their available recourse over
              ClaimCheck determinations. DOD told contractors that ClaimCheck
              determinations could not be appealed but did not sufficiently communicate
              to them that an allowable charge review process could be used for
              reviewing ClaimCheck determinations. As a result, contractors improperly
              informed providers and beneficiaries that they had no recourse when
              ClaimCheck denied or modified a claim. After beneficiaries and providers
              complained that DOD and its contractors did not make a review process
              available to them, the Congress mandated that DOD establish an appeals
              process for ClaimCheck denials in the Defense Authorization Act for Fiscal
              Year 1999 (P.L. 105-261).

Conclusions   In conclusion, we found that DOD’s contractors have met DOD’s standard
              by paying at least 75 percent of claims on time. Even so, providers are
              concerned because millions of claims are not being paid in a timely way.
              Moreover, the overall timeliness of contractors’ performance masks
              weaker performance in processing certain specific claims, including those
              submitted by hospitals. It appears that the majority of claims processing
              issues currently being faced by the TRICARE system are rooted in
              weaknesses in DOD’s approach to monitoring and communicating with its
              contractors. Furthermore, DOD’s methodology for its payment accuracy
              audits is statistically unsound and does not provide an accurate
              measurement of payment errors. Although the extent of error is unknown,
              contractors told us that TRICARE’s inherent complexity also impedes
              claims processing accuracy. In addition, we found that inappropriate
              denials were sometimes made because of DOD’s poor communication and
              slowness to make program changes that affect ClaimCheck outcomes.
              Providers were further frustrated because they mistakenly believed that
              they had no recourse for ClaimCheck denials.

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Defense Health Care: DOD Needs to Improve
Its Monitoring of Claims Processing

Claims processing problems are causing providers to become disillusioned
with the TRICARE program. Although DOD and contractors are taking
steps to address these problems, if they are not resolved, DOD could face
increasing problems attracting the number of civilian providers necessary
to ensure that beneficiaries have adequate access to health care. Later this
year, we will be issuing a report with recommendations, which, if
implemented, should help address DOD’s claims processing problems.

Mr. Chairman, this concludes my prepared statement. I will be glad to
respond to any questions you or other Subcommittee members may have.
We look forward to continuing to work with the Subcommittee as it
exercises its oversight of the TRICARE program.

Page 10                                                     GAO/T-HEHS-99-78
Appendix I


                                                      TRICARE contractor                TRICARE subcontractor
                     Regions included in our review
                     Northwest                        Foundation Health Federal         Wisconsin Physicians
                                                      Services, Inc.                    Service
                     Southwest                        Foundation Health Federal         Wisconsin Physicians
                                                      Services, Inc.                    Service
                     Southern California, Golden Foundation Health Federal              Palmetto Government
                     Gate, and Hawaii-Pacific    Services, Inc.                         Benefits Administrators
                     Central                          TriWest Healthcare Alliance, Palmetto Government
                                                      Inc.                         Benefits Administrators
                     Southeast and Gulf South    Humana Military Healthcare             Palmetto Government
                                                 Services                               Benefits Administrators
                     Regions not included in our reviewa
                     Northeast                        Sierra Military Health            Palmetto Government
                                                      Services                          Benefits Administrators
                     Mid-Atlantic and Heartland       Anthem Alliance for Health,       Palmetto Government
                                                      Inc.                              Benefits Administrators
                     aWe did not include these regions because they did not have at least 1 year of claims processing
                     experience as of July 1998.

(101614)     Letrt   Page 11                                                                        GAO/T-HEHS-99-78
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