Medicare: Effects of Budget Reductions on Contractor Program Safeguard Activities

Published by the Government Accountability Office on 1990-06-14.

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

                    United   States General Accounting    Office

For Release          Medicare:      Effects   of Budget
on Delivery          Reductions     on Contractor
Expected    at       Program    Safeguard    Activities
9:30 a.m.     EST
June 14, 1990

                     Statement     of
                     Janet   L. Shikles,       Director
                     Health    Financing     and Policy      Issues
                     Human Resources        Division

                      Before    the
                      Subcommittee     on Health
                      Committee     on Ways and     Means
                      House of Representatives

                                                                      GAO Form 160 (12/87)
Mr.    Chairman           and    Members           of the      Subcommittee:

          We are pleased                to    be    here      today        to discuss            our current
efforts         to assess         the vulnerability                       of the Medicare                program          to
waste,         abuse,      and mismanagement.

          Our work         is    focusing           on the       insurance            companies            that         contract
with      the    government             to process            and pay claims                   for     Medicare-covered
services.              There     are     52 "intermediaries"                       under        part     A and 35
"carriers"             under     part        B currently              under       contract.             In recent           years,
funds      available            to these           Medicare           contractors              for     carrying          out
claims         processing         and payment               safeguard             activities            have not kept
pace with         the      growth        of the program.                       As a result,             we were
concerned          about        the     contractors'                 ability       to perform             their
responsibilities                 and ensure           the       proper           expenditures             of Medicare

          Although         we are in the              early           stages       of our evaluation,                      our
information             suggests         that       there       has been a serious                      deterioration
in the Medicare                 contractors'               ability             to ensure        the     accuracy           of
program         payments.             Largely        because            of funding             shortfalls,
contractors             are

          --    cutting         back on medical                 and utilization                      reviews       of    claims

                that      are essential              in detecting                 and preventing                  erroneous
          --    cutting         back on the           audits         of billions             of dollars           in costs
                claimed         by institutional                providers,            and

          --    unable        to pursue           hundreds         of millions          of dollars
                potentially              owed to Medicare               by private             insurance


          Medicare           is the       fourth      largest          category        of federal
expenditures              after      defense,         social          security,        and interest               payments
on the         national         debt.        During      fiscal         year        1990,      Medicare          is
expected         to provide              health     coverage           for     over    33 million               aged and
disabled          persons          at a total         cost      of $109 billion.                       Of this        amount,
$1.9      billion,           or 1.7 percent,             represents               administrative                costs,
including            those        incurred        by the       Health        Care Financing
Administration                 (HCFA) and those                paid      to the Medicare                 contractors
for    processing             about       547 million           claims.

          Throughout            Medicare's          history,           benefit        costs           have grown
faster         than     both       the    general       inflation            rate     and the           gross      national
product,          as have health               expenses            in general.              Benefit       costs
increased             from     $34.6      billion       in 1980 to $95.5                    billion        in    1989,     an
average         annual         increase        of about            12 percent.              A small       part        of the
overall         growth         is due to an increasing                       number of beneficiaries.
During         the     period       1980 through             1989,       the      number of Medicare

beneficiaries               increased       about         16 percent,             from    28.1         million           to over
32 million.             Another          reason     has been that,                 on average,               each
beneficiary           has received               more services            and more expensive                        types         of
services,           in part       because         of the      availability               of new technology.


          Medicare          is a complex           program       with       numerous           rules         about         the
types      of services            covered,         the     conditions             under      which         the      services
qualify       for     payment,           and the method             for     determining                the    amount paid
for     covered        services.           These rules           are designed                to ensure              that          (1)
only      medically          necessary           and appropriate              care        is provided               to
beneficiaries,               (2) the       amount paid           for       such care           is      reasonable,                 and
(3) the       program          is protected              from waste         and abuse.                 Most of the
money that           carriers           and intermediaries                 receive           from Medicare                   is    for
enforcing           these      rules.

          Carriers          and intermediaries                perform         two functions                  to assure
the     accuracy         of Medicare             payments--      claims           processing             and payment
safeguard           reviews.            The claims         processing             activity          involves             a
myriad       of checks--both                automated         and manual--to                  verify         that
services        are covered,              that     charges       are reasonable,                    that      the        claim
is not       a duplicate,               and that         numerous         other      payment           criteria              have
been met.            Claims       processing             can result          in denying             a claim          or in
identifying            claims      that      need further              review        through           payment
safeguard           activities.
          Contractor            payment            safeguard          activities             complement            the        normal
claims       processing               activities            by providing             additional              means to
assure       that       Medicare          payments             are appropriate.                  Payment               safeguards
include        three          types      of activities.                  First,       the      contractors                   perform
medical        and utilization                     review       of all      submitted            claims           to     determine
whether        the      services           furnished            were medically                necessary                and
appropriate.1                  Included            in the       scope of these                review         activities             are
evaluations             of the         amount        of services            provided           and the            necessity            of
the      services            in treating            the     patient's          condition.

          The second            major         payment          safeguard          activity           is    intermediary
audits       of the           cost     reports         submitted          by providers                that        are
reimbursed             for     services            on a cost          basis.         These       include               services
provided         by home health                    agencies          and outpatient              services               provided
by hospitals.

          The third            safeguard            activity          is assuring             that        other         insurers,
whose coverage                 is primary            to Medicare,              pay    claims          before            the
Medicare         program.              This        safeguard          is called         the Medicare                    Secondary
Payer       (MSP) program.

IIntermediaries        do not review inpatient     hospital   claims    for
medical      necessity   or appropriateness.     This function       is performed
by peer review organizations           (PROS), which contract      with Medicare
specifically       for this function.
         In total,            contractors         were paid             about     $358 million               in 1989 to
carry      out these           program       safeguard            activities            that     saved the
Medicare       program           about      $4 billion         --a      cost-benefit             ratio       of about
11 to 1.

         HCFA establishes                savings         goals        and/or      cost-benefit               ratios        for
each contractor                in each of the             program          safeguard            activities            as part
of the      Contractor              Performance          Evaluation             Program.           Contractor
performance            is measured           annually          against          these      expectations.


          From 1984 through                 1989 the          total      amount paid             to the Medicare
contractors            increased         from         $817 million             to about         $1.3     billion.           At
first      glance,        this       increase--about                  60 percent--appears                    to be
significant.              However,          a closer          look      at these          figures,           in the
context        of other          changes       to the Medicare                  program         during        the     same
period,        suggests          otherwise.

          Medicare's           claims       volume       has been increasing                      at an annual
rate      of about        10 percent            for     the    past      decade.           When the           total
contractor            budget        is viewed          on a cost-per-claim                     basis     and adjusted
for     inflation,            the    amount paid           to the         contractors             actually
decreased            during      that    period--         from        $3.53     per     claim      in 1984 to about
$2.74      per claim            in 1989,       an average              annual     decrease             of about        5

percent.          At the            same     time,       legislative           and programmatic                   changes
significantly                increased          the      costs       and demands placed                on contractor

         The cutbacks                have been most noticeable                          in the      funding
specifically                designated           for     the      three      contractor          program          safeguard
activities.                  For example,               program        safeguard          funds     were cut            from
about      $358 million                in 1989 to $332 million                         in 1990,      a decrease              of
$26 million.                 The administration                    acknowledges            in the         1990 budget
that     savings            from medical               and utilization             review         are expected              to
drop     by $37 million,                    savings        from provider               audits      by $120 million,
and savings              from part           B MSP by $335 million.                       The fiscal             year       1991
budget        requests          $335 million               for     program       safeguards.

         Because            of our concern                about      the     effects       of these         budget
cutbacks         on program                safeguard           activities,         we started             a broad
planning         survey         in January              1990 to begin            assessing          the
vulnerability                of the Medicare                   program       to waste,           abuse,      and
mismanagement.                  To date,             we have performed                 limited      work         at
intermediaries                and carriers                in Arizona,           California,           Maryland,
Oregon,         Virginia            and Washington.                  Our work          indicates          that        reduced
funding         for      contractors             may be seriously                hampering          their         ability
to ensure             the    accuracy          of program            payments.          I will      now discuss
some of the              problems           we are seeing              in each of the              three         program
safeguard             activities.
Medical       and Utilization               Review

          There      are two key components                     to the medical           and utilization
review       process.          The first          is the        complement          of automated              screens,
both      HCFA-mandated             and contractor-initiated,                       used by the
contractors.               These screens            are generally            based      on certain               dollar,
service       volume,         or other        parameters          that      are used to               identify
questionable              claims.       Next       is the human factor,                 the      cadre        of
trained       personnel--generally                   nurses --who           review      the      questionable
claims       and other         necessary           information            to determine           if      payment
should       be made.

          The budget          for    part     A medical          review      was reduced               by 42
percent,          from     $61 million         in fiscal          year      1989 to       $35.5          million           in
fiscal       year     1990.         Because        of this       cutback,          intermediaries                  that     we
visited       have reduced             staffing        levels       by about         50 percent,
including           a substantial           number of nurses                who are essential                      to the
medical       utilization            review        function.           Thus,       some of the
intermediaries               are unable        to review          the      large     volume           of claims
rejected          daily      by various           screens       and edits          and are paying                  claims
that      otherwise         might      be denied.

          Others      are no longer            using        optional        screens       that         in prior
years      identified           many questionable                claims        and resulted              in
substantial           savings        to the Medicare              program.             For example,                 a
California           intermediary's               funding       was reduced           from    about           $7

million        in 1989 to $3.3                  million          in 1990.                Because            of the      budget
cuts,       the     intermediary               reduced          its      staff          of nurses            from      42 to 22.
The intermediary                    took     a number of actions                         to accommodate                 the
staffing           reductions,              including           recently            "turning           off"         some screens
that      previously               generated         about        $300,000              a month            in savings.

          An intermediary                   in Arizona           saw its            funding          reduced           from
$465,000           in 1989 to $255,000                     in     1990,          with      a corresponding                    50-
percent        reduction              in staff.            Intermediary                  officials             stated         that
screens        have not yet                 been turned               off,       even though                their      inventory
of questionable                    claims      requiring              manual        review        is now 300 percent
above normal.                     They indicated,               however,            that      many of these                    claims
may have to be paid                        without       being         reviewed.              In addition,                they
estimate           that       the     intermediary's                  medical           review        savings          will      drop
from       $4.5 million               in 1989 to about                   $1 to          $2 million             in     1990.

           An int.ermediary                 in Washington                told       us that           it     discontinued
several           cost-effective               screens          related           to hospital                outpatient
services.              An official             estimated              that       discontinuing                 these          screens,
which       cost       less        than     $100,000         per year,              could        result             in erroneous
Medicare           payments           of about          $422,000.                The official                added that              the
budget        cuts        will       also     prevent        the        intermediary                 from adding               new,
potentially                 cost-beneficial               screens.               For example,                the medical
review        staff          was concerned              about         a large           number of claims                  being
submitted             for        certain      outpatient              diagnostic            procedures.                  During         our
visit       the       intermediary             reviewed           a one-day              sample            of such claims                and

found       that     one hospital              had improperly                     coded      17 of 18           claims

submitted,           resulting             in about         $1,500             in excessive           Medicare

           In general,           contractors             are concerned                     about     the weakening
medical        and utilization                 review        process.                   Some told       us that,
because        the     provider            community            is       aware of which              screens         are being
used,       the     trend     toward         eliminating                  cost-effective              screens             is making
the Medicare               program         increasingly                  vulnerable          to     inappropriate

Provider           Audits

           The funding           level        for     the       intermediary                audit      function,                 $131
million,           remained         the     same between                  1989 and 1990.                However,             we are
concerned           that     only      a small          percentage                of Medicare           cost        reports--
generally           those     of the          largest           hospitals--are                 audited          before            final
settlement.                As a result,              billions             of dollars           in costs           claimed            by
smaller        providers--small                     hospitals,                skilled       nursing       facilities,                     and
home health            agencies--are                 never           audited.

           For example,             one intermediary                      official          told     us that             field
audits       will      be done at only                  12 of its                190 providers            this           year.            At
another           intermediary,             we were told                  that       the    number       of field                audits
has decreased               by about          50 percent                 in 5 years          and that           only        38 of
its     430 providers               will      be audited                 in    1990.        In the       last       3 years,

none of the             skilled          nursing       facilities            in Washington                or Oregon have
been audited.

                   We are also           concerned          that     shortcomings               in the       audit
process            may give        providers         an incentive             to   inflate             reported        costs.
As discussed                 earlier,       with     the     reduction          in the          number of audits,
it     is    likely          a provider's           cost     report      will      not     be audited.
Further,            even if        the    cost      report         is audited,           the     actual          settlement
often        is not          completed       for     about         2 years.        If     the      auditors           then
find        that      Medicare          has overpaid--             as they      often       do--the          provider
repays         only     the       overpayment          amount with            no interest.                  Thus,      the
provider,             in effect,          has had a 2-year               interest-free                   loan       in the
amount         of the         Medicare       overpayment.

Medicare            Secondary           Payer      Prooram

            Over the          past      several      years,         we have issued               a number of
reports            related        to the MSP program.2                  These reports                  generally
focused            on the       problem      of identifying              other          insurers          that       have the
responsibility                  of paying          before      Medicare.           Recent             legislative            and
administrative                  actions--        such as the           requirement              for      an Internal
Revenue            Service/Social            Security          data     match--should                  enhance        the
contractors'                 ability      to identify              primary      payers.               However,        we are

2Medicare:   More Hoswital                          Costs      Should        be Paid        bv Other             Insurers
(GAO/HRD-87-43,  Jan. 29,                          1987).
Medicare:             Incentives   Needed to Assure Private                                    Insurers          Pay Before
Medicare            (GAO/HRD-89-19,   Nov. 29, 1988).
concerned         that,        even if          these      measures           are effective,                contractors
may not        have the         staff       needed to turn                   the     leads       into     tangible
savings        to the Medicare                  program.

          In our current                survey,         for     example,            we are seeing            that
contractors            have backlogs               of claims           in which           a potential              primary
insurer        has been identified                      after        Medicare         paid       the    claim.            Due in
part      to the budget            cutbacks,             contractors                do not       have the          staff            to
develop        these      cases         and pursue             recovery            from private            insurers.
This      is particularly                true      in part           B, where         the     funds        for     MSP were
cut     from    about         $36 million           in fiscal               year     1989 to about                $15
million        in 1990,         a reduction              of 60 percent.

          The situation            at the Medicare                    contractor             in Maryland,
responsible            for     processing           claims           under         both   part      A and part                 B,
illustrates            this     problem.            Through           its     MSP investigative                    efforts,
the     contractor            developed           information--              including           policy          numbers--
which      showed that            other         insurers         were probably                responsible                for
thousands         of claims             paid      by Medicare.                These claims                dated      from
1983 to        1989.

          Our analysis            of a sample                 of about        3,300         of these        claims
showed that            the potential               erroneous           Medicare           payments          totalled                at
least      $8.7    million.              The contractor's                    records         identified            its
parent        company,         Blue      Cross/Blue             Shield        of Maryland,                as the

commercial           insurer         potentially             responsible           for        about         $4.5 million
(55 percent)            of the          total      amount          in question.

         Currently,            the      contractor           has one half             of a full-time-
equivalent           staff       person          assigned          to pursuing           the        recovery         of these
overpayments            from private               insurers.            Contractor             personnel            estimate
that     three       to six       additional              staff,       at an annual                 salary        cost      of
less     than       $200,000,           would      be able          to work this              backlog            in less         than
1 year.          In a March             1990 letter            to HCFA, the              contractor               requested
additional           resources           for      this     effort,        but     the        request         was denied.

         We found            a similar           condition          at contractors                  in Arizona           and
California.           Because           of funding           cutbacks,          the      contractors               reduced
their     MSP staffs             by about          50 percent,            and they            estimate            that      about
$13 million           in potential                erroneous           payments        will          not     be recovered
from private            insurers.

         HCFA agrees             with      our preliminary                estimate            that,         nationwide,
these     potential            overpayments               could       be as much as $200 million,                                or
about     60 percent             of the          estimated           $335 million             that        will     be lost
due to cutbacks                in part           B MSP funds.             The proposed                MSP budget             for
fiscal       year     1991 is virtually                    the       same as that             for     1990;        thus,
improvements            are not          likely          in the       near   future.

         The probability                 that      some of these             potential               overpayments
will     ever    be collected                   from private           insurers          is    reduced            further          by

Department              of Health            and Human Services                       (HHS) regulations                    issued     in
October            1989.         These regulations                   state        that        unless        contractors
initiate            recovery         action            within      15 to 27 months                     after      identifying
another            insurer         as being            primary,          the     insurer           will     no longer            be
considered              liable        for       the     amount paid              erroneously               by Medicare.
Thus,       the       clock        may have started                  on thousands                  of claims           in which       a
primary            payer        has already             been identified,                     but     resources          are not
available             to pursue             recovery.             The combined                effect        of these            two
factors--           the      regulations               and the       budget           cuts--could               be to excuse
private            insurers         from         a liability             of hundreds               of millions             of
dollars            owed to Medicare.

Growth            in the        "Continqencv              Fund"
in the Medicare                    Contractor             Budqet

           While          funding         for     the     cost      effective            program           safeguard
activities                has been decreasing,                      another           part         of the Medicare
contractor              budget        has grown             significantly                over        the       past    several
years.            Historically,                 the    contractor              budget        has contained              an amount
designated                as a "contingency                     fund."          The purpose               of this       reserve
account            is to provide                 for     unanticipated                administrative                  costs,      such
as those             due to an unexpected                        growth         in the        claims           workload.

           HCFA monitors                  contractor             expenditures                and workload
throughout                the     year,         and can request                 the     release           of contingency
funds        if      needed.          Such requests                 go through               HHS, and must be

approved        ultimately            by the     Office          of Management              and Budget(OMB).
Unused contingency                   funds     are   not        carried         over     from year        to year
and remain           in the Medicare             trust          fund.

           The contingency             fund,     as a line              item     in the       budget,       has grown
significantly--              increasing         from       $20 million,             or 2 percent            of the
fiscal       year      1985 Medicare            contractor              budget,        to    $100 million,          or
6.7 percent            of the        1990 contractor               budget.          The 1991 budget
proposes        a $173 million               contingency            fund,        which       represents        12.3
percent        of the        contractor         budget.

           Although       the      contingency           fund      has grown rapidly,                  none of the
money has been used since                       fiscal          year      1988,        when about        $47 million
was released.                About     $11.8     million,              25 percent,           of the      amount
released        was used for              contractor            claims         processing        and payment
safeguard           activities.              HCFA% 1989 request                    for      release      of over      $90
million,          including          $47 million           for     claims         processing          activities         and
$10 million            for    payment         safeguard          activities,             was denied         by OMB.
HCFA currently               has no plans            to request             release         of any of the          1990
contingency            fund       even though          a number of Medicare                     contractors         have
requested           additional         funds.


             The fact         that     we have identified                      weaknesses        in each of the
safeguard           activities         suggests          that      the      funding         cutbacks       have

caused        a deterioration                in the Medicare                contractors'                ability          to
insure        the     accuracy           of program          payments.               Attempting          to save
administrative                costs        by reducing          funding          for     payment         safeguard
activities            is penny-wise                and pound-foolish                   because      safeguards,                on
average,           save the Medicare                 trust      fund       $11 for         every        $1 spent.

         In the past,                we have recommended                   a number of actions                      to
improve        the      effectiveness               of program            safeguards,            and our ongoing
work     is    likely         to identify            additional            opportunities                for
improvement.                However,         we believe            that     the more immediate                      solution
to the        problem         lies       in adequate           funding          of these         important
safeguard            functions.             Increasing          funding          for     program          safeguard
activities,             and thereby            cutting         inappropriate               program            payments,
could     help        lessen         the    need for         the    difficult            across-the-board                     cuts
to all        providers           that      this     Subcommittee               is     faced     with         annually.
Two options             for    increasing            funding        are appropriating                     additional
funds        for    these      budget        line      items       and thus            increasing             the   overall
contractor            budget,         or using         contingency              funds.

         This       concludes            my prepared           statement.              I will      be happy to
answer        any questions                you may have.