Department  of  Health  and Human  Services 
OFFICE  OF 
INSPECTOR  GENERAL 
SUMMARY  OF  OIG  ACTIVITIES  ON 

MEDICARE 

JUNE  1993  OEI-12-93-00010 
 EXECUTIVE  SUMMARY 
PURPOSE 
This report  consolidates information  obtained  during the course of Office  of Inspector 
General  (OIG)  reviews of the Medicare  program  and offers solutions to long standing 
problems.  This is not an assessmentof the Health  Care Financing Administrations 
(HCFA)  effectiveness in managing Medicare.  We focus on problems which have not 
been resolved.  As policymakers  consider ways to reform  the health care system, 
lessons drawn from  the Medicare  program  can be instructive. 
BACKGROUND 
Medicare  is a large and rapidly  growing program.  In  1992, Medicare  had 36 million 
elderly  and disabled beneficiaries.  It  issued $129 billion  in payments.  The number  of 
beneficiaries  has almost doubled since 1967.  Current  Medicare  expenditures are 
almost triple  the entire nations health care spending in 1967. 
Medicare  is a complex program.  Paying for medical care is complicated  by the 
multifaceted  nature  of medicine.  Additionally,  paying for health care is a three step 
process.  First, beneficiaries  are treated by health care providers.  Second, those 
providers describe their  services on claims they submit for payment  (593 million  claims 
were processed in  1991).  Finally,  81 private insurance companies (under contract to 
the Government)  determine  how much should be paid and make the payments. 
ISSUES 
llae Medicare program must ensure that payments to providers are fair  while reducing 
&inirtraZive  burdens.  Three basic problems cause excessivepayments: inaccurate 
claims, payment  rates, and other insurers not paying their  share.  The challenge of 
reducing administrative  burden while  ensuring that payments are accurate is a 
substantial one, discussed more fully  in the OIG  report,  Electronic  Data  Interchange: 
Issues and Challenges. 
Inaccurate CZuirns: Medicare  can lose money when claims submitted by 
b 	
providers  do not accurately reflect  the services they performed.  The coding 
systems (which identify  medical services) are gamed via unbundling  (submitting 
separate bills for each component  of a service).  Medical  services are 
sometimes exaggerated through  upcoding.  Actual  charges are misrepresented 
through  the waiver of coinsurance and deductibles.  In other situations, the 
coding systems do not accurately reflect the service performed. 
Payment Rates:  When Medicare  started, it paid most health care providers 
b 	
their  reasonable charges or costs.  New rate setting methods for a variety of 
providers have been established.  While  these changes have been an 
i  improvement,  some payments are still too high.  Many  of the adjustments and 
exemptions to the hospital payment methodology  are not justified  by higher 
hospital costs. Additionally,  the new physician fee schedule does not properly 
reflect the overhead costs of efficient  providers of medical services. 
Other Insurers:  Finally,  other insurers bear primary  responsibility  to pay for the 
b 	
health care of some Medicare  beneficiaries.  Some of these beneficiaries  are 
covered through  employee health plans (if they or their  spouse are still 
working),  and automobile  insurance (if they are accident victims).  In many 
cases,the contractors that Medicare  hires to handle its claims are the insurance 
companies that are liable  as primary  insurers.  We found that billions  of dollars 
were being wasted because the secondary payer statute was not being properly 
implemented. 
5% Medicare program must ensure that the servicesprovided to benejkiati  are 
necessary,appropriate, and high quality.  Inconsistent coverage decisions, lack of 
controls, and limited  quality  oversight hamper the programs ability  to fulfill  this 
responsibility. 
Ihe  Medicare progiam  must addressjZnuncia1con$?ictsof interest which may lead to 
abuse.  Financial  conflicts of interest  exacerbate concerns about the quality  and cost of 
services. Physicians can profit  from  referring  patients to facilities  or other providers in 
which they have a financial  interest.  Providers can be offered  kickbacks, or seek them, 
in exchange for patient  referrals.  We reported  on this issue in 1989 and 1991.  We 
have also opened over 850 investigations on kickback issues and have obtained  close 
to 570 convictions, settlements and other sanctions, and almost $16 million  in 
recoveries. 
TIheMedicare program must examine i& payment systemsto ensure that they are not 
vzdnerabk to j?aud and abuse.  Medicares  reliance on private insurance carriers carries 
with  it inherent  conflicts of interest and opportunities  for problems.  Additional 
reliance on computer  systems and the electronic submission of claims may create new 
vulnerabilities  to fraud, waste, and abuse. 
As discussed in this report,  the problems and challenges facing the Medicare  program 
are substantial.  During  the course of our audits, inspections, and investigations in the 
Medicare  program, we have made numerous specific recommendations  for change. 
Many of these recommendations  have been accepted by the Health  Care Financing 
Administration  and some have not.  Some require  legislative changes; others can be 
accomplished through  administrative  action. 
All  significant  unimplemented  OIG  recommendations  are included  in one of two 
documents.  The Office  of Inspector  General Cost-Saver Handbook  (the Red Book)  is 
a compendium  of recent OIG  recommendations  to reduce unnecessary spending by 
ii  the Department  through  administrative  or regulatory  change, or by the Congress and 
Administration  through  legislative change.  The Office  of Inspector  General Program 
and Management  Improvement  Handbook  (Orange Book)  contains recent 
recommendations  for strengthening program  and management efficiency and 
effectiveness.  For our readers convenience, we have reproduced  our listing of 
recommendations  to improve  the Medicare  program  in the appendices to this report. 
To reduce the level of fraud, waste, and abuse in Medicare,  policymakers  should: 
improve  coding systems, 

base fee schedules on the reasonable costs of efficient  providers, 

aggressively enforce the secondary payer statute, 

identify  and eliminate  unnecessary and inappropriate  coverage variations, 

ensure the quality  of medical services, 

discourage financial  conflicts of interest, 

strengthen Medicare  systems, and 

develop payment  alternatives. 

... 
111  TABLE  OF  CONTENTS 
EXECUTIVE  SUMMARY 
INTRODUCTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1 

ISSUES  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 

Preventing and Identifying 

Excessive Payments  . . . . . . . . .  .......  . . . . .  . . . . .  . . . ..........  4 

Ensuring Quality  of Care  . . . . .  .......  . .  . . . .  . .  . .  . .  .........  12 

Addressing Financial  Conflicts 

of Interest  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  15 

Improving  Medicare  Payment Systems  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16 

RECOMMENDATIONS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18 

Appendix  A.  Unimplemented  OIG  Recommendations:  Cost Savers 

Appendix  B.  Unimplemented  OIG  Recommendations:  Program Improvements 

Appendix  C.  Endnotes 
 INTRODUCTION 
PURPOSE 
This report  consolidates information  obtained  during the course of Office  of Inspector 
General  (OIG)  reviews of the Medicare  program  and offers solutions to long standing 
problems.  This is not an assessmentof the Health  Care Financing Administrations 
(HCFA)  effectiveness in managing Medicare.  We focus on problems which have not 
been resolved.  As policymakers  consider ways to reform  the health care system, 
lessons drawn from  the Medicare  program  can be instructive. 
BACKGROUND 
While  the private  sector finances most health care, public  spending is substantial as 
well.  In  1992, the Federal government  accounted for  30 percent of health spending. 
Payments for  the 36 million  Medicare  beneficiaries  (this program  finances health care 
for  the elderly  and disabled) were $129 billion.  The Federal share of Medicaid 
payments (this program  finances health care for low-income  persons) was $70 billion. 
The HCFA  runs both  of these programs and absorbed 12 percent of the Federal 
budget in Fiscal Year  (FY)  1991. 
The enormous size of the Medicare  system could have barely been foreseen by its 
creators.  In  1967, Medicare  covered 20 million  people.  National  health spending was 
$51 billion,  a third  of what Medicare  alone now pays out for health care.  The number 
of providers  doing business with  Medicare  has increased dramatically.  In  1975, 2,254 
home health  agencies billed  the program.  In  1992, that number was 5,963.  In  1975, 
almost 3,000 independent  laboratories  did business with  the program.  In  1992, that 
number was 7,509.  In  1975, there were no end stage renal disease (ESRD)  facilities 
billing  the program.  In  1992, 2,211 ESRD  facilities were billing  Medicare. 
Medicare  contracts with  private  health insurance companies called fiscal intermediaries 
and carriers to handle day-to-day claims processing and related  operations.  Fiscal 
intermediaries  process claims under Part A of the program, which includes hospitals, 
nursing homes, home health  agencies and other institutional  providers.  Intermediaries 
processed 92 million  claims in  1991, at a cost of $1.64 per claim.  Carriers process 
claims under Part B of the program, which includes physicians, laboratories,  and other 
noninstitutional  providers.  Carriers processed 501 million  claims in 1991, at a cost of 
$1.13 per claim.  The HCFA  has introduced  major  changes to the claims processing 
system and plans more.  A new electronic  bridge links all Medicare  systems and allows 
for cross checks of eligibility  and payment information.  In order to encourage 
electronic  submission of claims by providers, which reduces administrative  costs of 
handling  the claim, new payment rules allow HCFA  to pay electronic  claims more 
quickly  than paper files.  The HCFA  plans to reduce the number  of carriers that 
process claims for durable  medical equipment,  prosthetics and orthotics  supplies, in 
order to obtain  more control  over payment for these claims.  Finally,  and perhaps 
1  most significantly,  HCFA  has proposed the development  of a standard Medicare 
Transaction  System, replacing the 14 different  systems currently  used by Medicare 
contractors. 
In addition  to having their  claims processed by different  contractors, different  types of 
providers are paid based on different  payment methodologies.  Initially,  all providers 
were paid based on their  reasonable and customary charges. This gave providers 
very little  incentive to be prudent  and their  charges frequently  bore little  relationship 
to the cost of delivering  services. Hospitals were reimbursed for their  reasonable 
costs and physicians received their  reasonable charges.  Beneficiaries were given 
incentives to control  costs in the form  of coinsurance, deductibles, exclusions, and the 
responsibility  to pay for any charges above what Medicare  determined  to be 
reasonable. 
Since the inception  of the program,  several new approaches to pricing Medicare 
payments for health care services have been developed.  The prospective payment 
system (PPS) for inpatient  hospitals was introduced  in 1984.  It  pays a predetermined 
amount  for treating  beneficiaries with  specific illnesses. Hospitals  report  the diagnosis 
of the patient  and procedures performed;  based on this information,  a diagnosis-
related group (DRG)  is assigned. Medicare  pays the hospital based on the DRG 
assigned and makes adjustments which take the hospitals location,  patient  mix, and 
other factors into  account.  Because the amount per patient  is fixed and known in 
advance, hospitals have an incentive to be efficient  in serving patients.  In the past, 
efficiency could have cost the hospital money, since the more services it provided  the 
more it was paid. 
The Medicare  program  has instituted  fee schedules for a number  of other services. 
For example, a fee schedule was implemented  for medical equipment  and supplies in 
1989 which prescribed a set range of acceptable payments that could be made for 
various types of medical equipment  and supplies.  Carriers then retained  some 
flexibility  to pay suppliers differently  depending on past practice and geographic 
considerations, but variation  in payment amounts was reduced to a fixed range.  This 
fee schedule was based on average historical  charges of medical equipment  and supply 
providers. 
The most extensive fee schedule implemented  to date is for physician services. This 
new system will  be phased in over time  and began in 1992. The new Medicare  Fee 
Schedule is based on extensive efforts by researchers at Harvard  University  to identify 
the amount  of work  involved in physician services. Before the implementation  of the 
Medicare  Fee Schedule, we and other analysts frequently  identified  overpriced 
services.  Congress would  respond by passing legislation to mandate reductions in 
payment rates.  The new resource-based physician fee schedule attempts to correct 
past mistakes by basing fees on the resource costs of providing  a service rather than 
on past charges, which tended to overcompensate surgeons and encourage high-tech 
procedures. 
2 
 The HCFA  plans future  reforms  in payment methodology.  Since 1986, HCFA  has 
been working  on developing methods to reimburse  outpatient  surgery facilities  in a 
prospective manner.  Currently,  hospital outpatient  departments  are reimbursed 
largely on costs.  Developing  an appropriate  methodology  for the reimbursement  of 
outpatient  surgery in hospitals and free-standing facilities  is important  to the program 
because more services than ever are being provided  on an outpatient  basis. 
Role of the Qfice  of Inspector General 
The OIGs  mandate is to protect  the integrity  of the United  States Department  of 
Health  and Human  Services (DHHS)  programs and the beneficiaries  of those 
programs by reducing fraud, waste, and abuse and by promoting  the effectiveness and 
efficiency  of the departments  programs.  About  one-third  of our resources are 
devoted to oversight of the Medicare  program. 
The OIG  accomplishes its mission through  a series of audits, evaluations (inspections) 
of program  operations,  and investigations of possible criminal  or civil violations.  The 
OIG  also reviews all regulatory  and legislative proposals developed by the Department 
to assesstheir  effect on fraud, waste, and abuse. 
During  the past four years the OIG  has issued more than  187 audit and inspection 
reports on the Medicare  program  identifying  more than $20 billion  in potential 
savings.  We have recommended  numerous improvements  in program  operations.  In 
FY  1991, we wereinvolved  in  1,238 successful criminal  and civil health care actions 
against those who defrauded  or abused the Medicare  and Medicaid  programs. 
MEXHODOLOGY 
The issues presented in this report  are based on inspection, audit and investigative 
work  of the OIG. 
Rather  than present findings, as we normally  do, this report  describes the challenges 
facing the Medicare  program.  We describe how program  managers must determine 
the appropriate  payment  for services and supplies, must ensure that care provided  to 
beneficiaries  is necessary and appropriate,  must face the increasing problem  of 
financial  conflicts of interest for providers, and must improve  systems. 
3 
 ISSUES 

PREVENTING  AND  IDENTIFYIN  G EXCESSIVE  PAYMENTS 
The  Medicare  program  must  ensure  that  payments  to  providers  are  fair  while  reducing 
administrative  burdens. 
Three  basic problems cause excessivepayments: inaccurate claims, inappropriate 
payment rates, and other insurers not paying their  share.  Each of these are discussed 
below.  The challenge of reducing administrative  burdens is discussedin a separate 
OIG  report,  Electronic  Data  Interchange:  Issues and Challenges. 
HCFA  must ensure that claimr submitted for servik~ are accurate. 
b 
The Medicare  program  loses money when providers submit inaccurate claims that 
dont reflect  the services actually performed  or the supplies actually delivered. 
Providers can also,be disadvantaged by being paid too little  when inaccurate claims 
are submitted. 
Hospitals  billings  must be scrutinized to ensure that proper  diagnosis, which 
determine  the DRG  payment, are reported  to the program.  In addition,  the cost 
reports of home health providers and nursing homes must be audited to ensure that 
only proper  amounts are included  and reimbursed. 
For noninstitutional  providers, the task of ensuring appropriate  billings is even more 
difficult,  although less total  dollars are at stake.  In  1991, $45 billion  was paid for  501 
million  medical claims submitted  by about 600,000 health care providers and suppliers. 
Seven thousand procedure  codes were used by physicians and 3,000 codes were used 
by suppliers.  Procedure codes identify  the specific services or items provided  and are 
used by Medicare  to determine  payments.  Medicare  uses computerized  prepayment 
edits to identify  potential  problems before claims are paid.  Postpayment reviews help 
carriers recover improper  payments by identifying  possible fraud, waste, and abuse. 
However,  gaming by providers, as described below, still costs the program  millions  of 
dollars each year. 
Gaming can take the form  of unbundling  (submitting  separate bills for each 
component  of a service, rather  than one claim for the overall procedure or item)  and 
upcoding (billing  for a more intensive service than the one actually delivered).  Other 
fraudulent  activities, such as the routine  waiver of coinsurance and deductibles, 
contribute  to overuse of services. Finally,  loopholes in the coding system may allow or 
even encourage inaccurate claims. 
Unbzuding:  Unbundling  allows providers to inflate  charges far above the appropriate 
levels.  Instead of billing  for  a complete  service or item, the provider  bills for all of the 
subcomponent parts.  As an example, an OIG  audit of physician claims in 
4  Pennsylvania estimated that there were potentially  $12.2 million  in such questionable 
payments annually in that State alone.  Procedures were unbundled  or in some cases 
physicians billed  for mutually  exclusive procedures.2  Medicare  is paying more than 
twice as much as physicians for  some clinical  laboratory  tests because it is paying for 
test profiles  or batteries  on an al-a-carte basis3  Another  OIG  review found 
physicians receiving $12 million  in overpayments for biopsies and/or explorations which 
were a part  of another  surgical procedure.4 
HCFA  has developed a limited  number  of edits for  carriers to use in identifying  and 
dealing with  unbundling.  As an illustration,  one of these edits is designed to prevent 
payment for both a total  abdominal  hysterectomy and removal of the ovaries at the 
same time  because, by definition,  the first procedure  includes the second.  Additional 
edits may well be needed.  Some private  payers have as many as 3,000 edits in their 
claims processing systems, as compared to about 300 in the Medicare  payment system. 
Upcoding:  Under  Medicares  prospective payment  system (PPS) for hospitals, 
hospitals benefit  financially  from  billing  for more intensive and costly diseases. An 
OIG  study of 1985 medical  records found  21 percent of hospital claims were 
improperly  coded, generally to the favor of hospitals and resulting in a $308 million 
overpayment. 5  We recently replicated  this study and found  as many underpayments 
to hospitals as a result of errors as overpayments.  As a general matter,  this means 
that Medicare  paid the right  amount  to hospitals as a group for services they provided 
to Medicare  beneficiaries.  However,  some individual  hospitals may be paid too much 
or too little. 
A  1989 OIG  report  showed wide discrepancies in the way that physicians bill  for 
evaluation  and management visits and recommended  numerous coding reforms.7  This 
variation  in coding suggeststhat some physicians may have been upcoding their  claims, 
claiming  a higher level of service was performed  than was correct.  In implementing 
the new Medicare  Fee Schedule, HCFA  has drawn samples of claims to determine  the 
accuracy of claims submitted  and to educate physicians on proper  reporting.  The new 
fee schedule will  not accomplish its goals if physicians inaccurately report  their  services 
and claim that services were performed  when they were not. 
Routine  Waiver of Coinsurance and Dedzdbks:  For some types of services, 
beneficiaries  must pay at least 20 percent of Medicares  allowed amount for the 
services they receive.  They must also pay an annual deductible  before Medicare 
usually pays anything.  The purpose of the coinsurance and deductibles is to involve 
beneficiaries  in health care decisionmaking  and provide  an incentive for the prudent 
purchasing of services and supplies. 
The importance  of this safeguard can be illustrated  by a study in which the OIG 
identified  provider  abuse in selling medically  unnecessary seat lift  chairs to Medicare 
beneficiaries.  Sixty percent of the recipients of seat lift  chairs we surveyed said that 
the suppliers told  them they wouldnt  have to pay anything for the chairs.  Sixty-nine 
5  percent said they never made payments for the coinsurance or deductibles8  Clearly, 
providers are more able to convince vulnerable  beneficiaries to purchase their  services 
and equipment,  even if it is of marginal  or no value, by telling  them that they have 
nothing  to lose by placing an order.  Many  of our investigations have shown that the 
routine  waiver of coinsurance and deductibles is a key element in scams to bill  for 
unnecessary or undelivered  services and items.  To highlight  this problem,  we issued a 
special fraud  alert on routine  waivers to over 800,000 health care providers.  The 
alert describes what types of waivers are illegal  and asks providers to report  violators. 
Imprecise coding  Systems: The Part B fee schedules tie payments to procedure and 
supply codes.  For physician services, HCFA  relies on a coding system developed and 
maintained  by the American  Medical  Association for physician services. For durable 
medical  equipment  and supplies HCFA  and representatives of the insurance industry 
have developed separate codes. These coding systems must differentiate  between 
services and supplies with  significantly  different  resource costs. This is not always the 
case. Some codes lump  together vastly different  services. Other  codes do not 
accurately reflect  the service performed  or the item  delivered.  For example: 
The procedure  codes for some ultrasound  services included vastly different 
F 	
procedures.  l1 I2  Included  under the same procedure codes were:  (1) 
one hour long procedures with  $300,000 machines that provided  color images of 
body parts, and (2) the use of a $300 pocket doppler  that took only 5 minutes 
and provided  audio feedback only on the flow  of bodily  fluids. 
A study of liver biopsy procedures found that there was no accurate procedure 
b 	
code for needle biopsies that involve surgical incisions.13 Physicians used a 
code that implied  that they had performed  a surgical biopsy. 
Suppliers sometimes provide foam rubber mattresses to beneficiaries and 
b 	
submit claims for more expensive air fluidized  beds.  These devices use warm 
air under pressure to set small ceramic beads in motion  which stimulate  the 
movement  of fluid  and can be useful for patients with  serious skin problems. 
The coding manual contains no description  of air fluidized  beds.14 Another 
Medicare  manual provides a detailed description  of the type of air flotation 
mattress that is covered by Medicare  but the coding manuals lack of detail 
makes it difficult  to support criminal  fraud convictions of suppliers. 
We recently completed  field work  on a study to evaluate the successof the coding 
system in preventing  fraud, waste, and abuse.  We reviewed previous audits, studies 
and other analysis performed  by the OIG  and others, and interviewed  representatives 
of the physician societies and carriers to gain a better  understanding of the systems 
strengths and weaknesses. We have concluded that legitimate  confusion, as much as 
provider  abuse, can lead to inaccurate claims.  Approximately  20 percent of physician 
respondents believe at least one-quarter  of the codes have inadequate definitions;  40 
percent of coders and HCFA  officials believe that to be true.15 
6 
 l%e HCFA  must ensure that payment rates are fair. 
b 
As discussed earlier,  the Medicare  program  started with very weak cost controls, 
paying providers  on the basis of their  costs and charges.  Such methodologies  provided 
little  incentive for  providers to deliver care efficiently.  Although  the program  has 
made much progress in this regard, problems  remain  in the reimbursement  for 
inpatient  hospitals, outpatient  facilities,  physician services, and supplies. 
Inpatient  Hospitals:  When Medicare  implemented  PPS, a number  of adjustments and 
exemptions were included  in the law.  We analyzed those adjustments and suggest 
reforms. 
The law gave teaching facilities  an add-on payment  amount called indirect 
b 	
medical  education payments.  We extensively analyzed the payment rates to, 
and the profit  rates of, teaching facilities.  We found that teaching hospitals 
were making  excessiveprofits.  Legislation  in  1987 reduced the add-on to 7.6 
percent and $1.1 billion  was saved in FYs  1989 through  1991.16 Additional 
analysis lead us to recommend  that the indirect  medical education payment be 
further  reduced.17 The FY  1992 budget request recommended  gradually 
reducing the indirect  medical  education  add-on further  to 3.2 percent.  If 
enacted this would  have saved more than $1 billion  in FY  1992. 
Medicare  pays for most hospital  capital costs on a pass-through basis.  A  10 
b 	
year phase-in to prospective payment rates for these procedures has been 
enacted.  Extensive audits show that past costs have been inflated  by the 
inclusion  of inappropriate  items.  Weve estimated that excluding those 
inappropriate  amounts could reduce payment  rates by as much as $920 million 
annually.18 
Medicare  compensates hospitals for the bad debts caused by beneficiaries who 
b 	
fail  to pay their  coinsurance or deductibles.  Hospitals  have little  incentive to 
collect bad debts because Medicare  will  cover the loss.  Audits  have found 
inadequate  collection  efforts.  Medicare  could save $400 million  annually by 
eliminating  this policy.  The HCFA  agrees with  the OIGs  option  to include  a 
bad debt factor  in DRG  rates.  This will  require  legislative action. 
Medicare  could reduce its costs by selectively contracting  for certain procedures 
b 	
(such as coronary artery bypass graft surgery.)  An  OIG  review found that 
hospitals and surgical teams that perform  a high volume  of these procedures 
offered  packages to health maintenance  organizations that combined  hospital 
and physician charges and were substantially less than Medicares payment.  We 
concluded that there is a need for legislation  that will  allow the negotiation  of 
fixed-price,  package agreements with  preferred  providers so that high quality  of 
care can be obtained  at costs significantly  less than the program  is currently 
paying.  The HCFA  has selected four  sites to serve as demonstration  projects 
7  to test our thesis.  The results will  be evaluated and serve as the basis for 
future  legislation.  We estimate that this approach could save $192 million 
annually.20 
Ozdpatient FadEties:  As discussed earlier,  a growing proportion  of medical services 
are being performed  in outpatient  settings.  Hospital  outpatient  services were not 
included in the prospective payment system and they continue to be reimbursed  (at 
least partially)  on a reasonable cost basis.  Medicare  pays more for services in 
hospital  outpatient  departments than it does for the same services in ambulatory 
surgical centers, which sometimes perform  the same services. Several OIG  reports 
have shown differing  reimbursement  amounts to different  types of facilities  for 
providing  the same services.212223 Yet, we found no significant difference  in the 
type of patients these facilities  treat or in the quality  of care delivered.24 
Differentiation  in payment according to place of service may not encourage delivery of 
services in the most cost-effective setting. 
Physician Services: Although  we applaud the work  done so far to rationalize  physician 
payments on the basis of resource costs, we and others recognize significant problems 
remain.  The work  of the Harvard  team which developed the resource based, relative 
value system did not include estimates of the practice cost, or overhead, required  to 
support  each type of procedure.  As a result, payments for practice expensesare still 
tied to historical  costs.  In addition,  overhead costs are spread evenly among all of the 
procedures performed  by a specialty.  This is an important  weakness because practice 
expenses are almost half of the cost of providing  physician services. Both HCFA  and 
the Physician Payment Review Commission are studying ways to identify  and 
reimburse practice costs. 
A further  challenge for HCFA  is to assign relative values to services which were not 
studied by the Harvard  team, or to update the relative values that have been assigned. 
We will  be scrutinizing this process in the future  to ensure that appropriate 
methodologies  have been established and are being followed  to maintain  the validity 
of the fee schedule. 
Another  area which has been extremely difficult  for HCFA  to address is the 
identification  and assessmentof new technologies.  We have pointed  out that 
Medicare  carriers make decisions about technologies differently,  and consequently 
arrive at different  decisions about what is covered or not covered.  We have also 
pointed  out that no system exists for ensuring that payments for new technologies 
decrease in response to decreasing costs for delivering an item  or service.25 We plan 
to conduct a follow-up  review to assessthe effectiveness of recent changes made to 
HCFAs  coverage and pricing  process to determine  if these vulnerabilities  remain. 
Durable Medical li$z.u>ment and Other Items:  The coverage and pricing for durable 
medical equipment,  prosthetics, orthotics, and supplies has received a great deal of 
attention  from  the OIG  and HCFA  over the past several years.  This may seem odd, 
since total  allowed charges for these items are a modest portion  of the total  Medicare 
8  budget, only $3.3 billion  in  1991.  Yet  we have documented  flagrant  and consistent 
abuses in this area over time. 
The legislation  that was enacted in 1990 to mandate national  floors and ceilings for 
prices narrowed  the variations  in pricing  among carriers.  It  also mandated specific 
reduction  in payments for  some types of equipment  and supplies that the OIG  had 
identified  as overpriced.  However,  additional  refinement  of the fee schedule may well 
be needed because the schedule was not based on the cost of manufacturing  an item 
but on historical  charge data.  Examples follow: 
We found that Medicare  was overpaying for intraocular  lenses and 
b 	
recommended  a reduction  in payments to $200 per lens.2627 HCFA 
implemented  our recommendation  in some settings and $60 million  was 
saved.28 Subsequent work  has found many providers paying less than $200 for 
lenses and weve recommended  that HCFA  drop its reimbursement  rate to 
$150 or lessF9 This recommendation  could save $100 million  annually.% 
We are now conducting another review of intraocular  lens purchase costs.31 
Supplying  oxygen to Medicare  beneficiaries  accounts for almost half of 
b 	
Medicares  durable medical  equipment  expenditures.  In  1987, we compared 
Medicare  reimbursement  for  home oxygen and oxygen equipment  with  amounts 
paid by non-Medicare  payers.  We found  that all  122 Veterans Administration 
hospitals paid less for each type of oxygen equipment  than Medicare.32  We 
re-evaluated payment  rates in  1991, after implementation  of the fee schedule, 
and found that Medicare  was still paying 178 percent more than the Veterans 
Administration  for  oxygen services.33 The Department  is seeking legislative 
authority  to move to a competitive  bidding  system for the delivery of oxygen 
services (and other  durable medical equipment)  in large urban areas. 
Despite  congressionally-mandated  reductions in the price of transcutaneous 
b 	
electrical  nerve stimulation  (TENS)  devices, the 1993 fee schedule amount is 
$429.  Some of these devices can be purchased wholesale for $35.  We have 
previously testified  on our concerns about the cost of these items and the 
amount  paid by Medicare  in testimony before  the Congress. 
Other  areas also need attention.  For example, a study of rapidly  rising payments for 
ambulance services found  that the reasonable charge methodology  for controlling 
increases in supplier  charges had been ineffective. 34 Although  HCFA  technically has 
the authority  to reduce payment  amounts when they are inherently  unreasonable, this 
authority  is rarely used. 
9 
 l%e HCFA  must ensure that other insurempay their share of the cost of services 
b 
for Medicare benejkiaries. 
Medicare  contractors are responsible for ensuring that a Medicare  payment is made as 
a secondary source to certain types of private insurance coverage.  The Medicare 
program  initially  paid for most health services provided to beneficiaries.  Beginning in 
1980, however, the Congress began enacting legislation that made Medicare  the 
secondary payer in certain cases. By 1987, legislative changes had been enacted that 
made Medicare  the secondary payer to Employer  Group  Health  Plans for those 
beneficiaries who are working  aged, disabled, or have end stage renal disease. 
We have issued numerous reports on Medicare  secondary payer (MSP) issues. Our 
reviews continue to show a need to recover past overpayments, avoid future 
overpayments, and expand the definition  of MSP to more beneficiaries. 
Recover Past overpayment  We have issued six reports that describes the need for 
adequate resources and financial  management systems to ensure that all past MSP 
mistaken payments (estimated  to be approximately  $961.6 million)  are 
recovered 35363738394o As of September  1992, HCFA  reported  about 
$961.6 million  in past MSP overpayments that had not been collected.  About  $681.6 
million  of this total were backlogged claims. 
To recover past MSP overpayments we recommend that HCFA  take the following 
actions:  (1) ensure that contractors resources are sufficient  and instruct  contractors to 
recover improper  primary  payments, (2) insure that contractors take sufficient  action 
to preclude the loss of backlogged MSP cases(i.e., claims where contractors are more 
than one quarter  behind in sending a demand letter)  because the recovery period 
lapsed, (3) implement  financial  management systems to ensure all overpayments 
(receivables) are accurately recorded, and (4) pursue alternative  strategies such as 
contingent  contracts, demonstration  and incentive programs, or fund collection 
activities from  recovery proceeds. 
During  FY  1992, HCFA  provided  the contractors an additional  $20 million  in 
administrative  funding  to reduce the MSP backlog, however, the backlog continues. 
The HCFA  has also developed a MSP overpayment tracking  system.  However, it is 
not considered a financial  management system.  In addition,  DHHS  submitted  a FY 
1994 legislative proposal to establish a payment safeguards revolving fund to provide 
smoother and more certain funding  levels which could result in more consistent and 
efficient  contractor  MSP operations.  HCFA  will  consider the question of 
demonstration  projects in the departments  legislative development  process. 
Improve Future Colkction  Efforts:  Collection  of accurate and timely  information  on 
other primary  payers is needed to reduce Medicare  overpayments in the future  which 
result from  unidentified  MSP casesand help the recovery process for overpayments. 
We have issued four  reports that describes the need for  collection  of accurate and 
timely  information  to reduce Medicare  overpayments by $900 million  per annum in 
10  future  years.4142434445 Identification  of MSP situations occurs through a 

variety of means:  beneficiary  questionnaires, provider  identification  of coverage when 

services are provided,  and the statutorily  authorized  Data Match  Project with  the 

Social Security Administration  and the Internal  Revenue Service. 

The HCFA  should:  (1) revise the justification  for a FY  1990 legislative proposal, 

which would  require  insurance companies, underwriters  and third-party  administrators 

to periodically  submit Employer  Group  Health  Plan (EGHP)  coverage data directly  to 

HCFA,  and resubmit  it for FY  1994, (2) require  that employers report  EGHP 

coverage on the Wage and Tax Statement  (W-2), (3) revise all Medicare  claims forms 

to require  a positive or negative response pertaining  to other health insurance 

coverage, (4) request that the Social Security Administration  maintain  beneficiary 

spousal information  in its Master  Beneficiary  Record  system for use by HCFA,  (5) 

establish a national  data bank system containing  primary  insurance information,  and 

(6) assure compliance with  all first  claim development  procedures and collect health 

insurance information  for  disabled beneficiaries  during the required  disability  waiting 

period. 

The HCFA  is considering these recommendations  and supports the establishment of a 

national  clearinghouse of health insurance information  as an alternative  to some of 

our recommendations.  Implementation  plans and policies have not been developed 

and corrective action has not been implemented.  Legislative  action is required. 

@ati  Dejinition  of MSP:  Medicare  should be the secondary payer for all State and 

local government  employees hired before April  1, 1986.  This proposal has been 

included  in previous Presidential  budgets.  Although  this proposal was not enacted, we 

continue  to advocate this legislation.  As an alternative  HCFA  could seek legislation 

making  Medicare  the secondary payor for retirees of exempt State and local agencies. 

These include  additional  Medicare  program  cost savings of about $2 billion  per year 

that could be achieved, if certain provisions of the legislation were expanded. 

We have issued two reports that promote  additional  cost savings if the MSP provisions 

were extended to include beneficiaries with  end-stage renal disease (ESRD)  without 

limitation  and those retirees of exempt State and local entities.46 47 While 

legislation  extended the ESRD  provision  from  12 to  18 months, we continue to believe 

that legislative acti,on is appropriate.  In the 102nd Congress, H.R.  11 (as passed by 

the Senate) continued  a provision  to extend the MSP ESRD  provision from  18 to 24 

months.  However,  this provision was not enacted. 

11 
 ENSURING  QUALITY  OF  CARE 
l%e Medicare program must ensure that the servicesprovided to benejkiati  are 
newssay,  appropriate, and high quality. 
For the sake of the programs financial  integrity  and beneficiaries  protection,  the 
Medicare  program  has a responsibility  to ensure that care it pays for is necessary and 
appropriate.  Inconsistent coverage decisions, lack of controls, and limited  oversight of 
quality  hamper the programs  ability  to fulfill  this responsibility. 
Inconsistent Coverage: Medicare  delegates most coverage decisions to local carriers, 
which leads to inconsistencies in coverage.  We have repeatedly pointed  out that this 
delegation  causes services to be covered in one jurisdiction  but not covered in another, 
duplication  of efforts by carriers to collect and analyze the information  necessary to 
make coverage decisions, and provider  confusion.  HCFA  believes that this diversity is 
consistent with  congressional intent  and that it is usually appropriate.  We have issued 
several reports on this issue: 
Medicare  carriers surveyed for a 1990 report48 found that carriers perceived 
b 	
numerous problems with  Medicares coverage decisionmaking process. They 
sought additional  guidance from  HCFA.  HCFA  maintained  that they were 
solving these problems  through  ongoing administrative  reforms. 
Another  OIG  study shows that carriers have been inconsistent in deciding when 
b 	
to withdraw  coverage of obsolete technologies.49 
A recent case study of one procedure  (transcranial  dopplers)  found that 
b 	
carriers continue to make inconsistent coverage decisions, base their  decisions 
on questionable criteria  and sometimes fail to implement  the decisions that they 
do make .5o We are concerned that HCFAs  efforts to improve  the coverage 
decisionmaking  process have not been successful. We are planning additional 
work  on this issue. 
TJmece,ssayServices: It  is difficult  for  any payer to determine  whether  services 
rendered by a medical professional are necessary. Such decisions are made implicitly 
by all payers in determining  the extent of the coverage afforded  to beneficiaries. 
However,  even within  the coverage guidelines set by any payer, providers may engage 
in abuse.  While  individual  casesof ordering  or providing  medically  unnecessary 
services may be difficult  to demonstrate, systems can either encourage or discourage 
providers in this regard.  It  is one of the significant problems associated with  fee for 
service medicine, in which the more services a physician supplies the more he or she is 
paid. 
A key way for  Medicare  to avoid paying for unnecessary services is strict adherence to 
coverage decisions:  We have not always found that Medicare  adheres to its own rules. 
For example, a random  sample of medical records (primarily  cataract surgeries) found 
12  that many monitored  (or local)  anesthesia services did not meet Medicares  coverage 
guidelines and that other  insurance carriers had more restrictive  coverage policies for 
this procedure. 52 A more recent study, in which we examined payments made for 
total  parenteral  nutrition  (TPN),  found  that half of the $148 million  paid out in  1991 
was for  services that did not meet the coverage guidelines.  This is especially troubling 
since only two carriers process claims for TPN, the coverage guidelines are quite strict 
and specific, and a certificate  of medical necessity is required  in order for a claim to 
be paid.  Further,  TPN  therapy is extremely invasive and should only be administered 
in specific instances of demonstrated  need.  Our findings suggest that carrier 
specialization  and use of certificates  of medical necessity or other documentation  of 
medical  need, by themselves, will  not assure proper  payment. 
When a service is covered, it is more difficult  to assessif the service was medically 
unnecessary in the particular  case at hand.  For example, claims for  outpatient  clinical 
laboratory  services account for about 25 percent of all Part B line items but less than 
10 percent of allowed charges.  Total  payments for  clinical laboratory  tests have been 
rising rapidly  despite reductions in per service payments.  Many inappropriate  factors 
(such as defensive medicine)  encourage the ordering  of lab tests.  The sheer volume 
and small dollar  amount  of these tests renders utilization  review cost ineffective.  In 
this case, we believe that the current  reimbursement  system encourages overuse of 
laboratory  services. Beneficiaries  have little  incentive to curtail  their  utilization  of 
these tests because they do not pay coinsurance or deductible  amounts on clinical 
laboratory  tests.  We have recommended  that HCFA  study ways to prospectively pay 
for  (or roll-in)  clinical  laboratory  services through  payments for physician office 
visits.53 We estimate that reductions in inappropriate  utilization,  administrative  costs, 
and the collection  of coinsurance would  result in savings of over $12 billion  in 5 
years.54 One large medical laboratory  chain recently plead guilty  to two felony 
counts because they performed  and billed  for tests that physicians considered 
unnecessary.  The company will  pay $110 million  in fines and restitution. 
Durable  medical  equipment  has also been a concern to us in this regard.  We have 
documented  many instances where medically  unnecessary medical equipment  or 
supplies were provided  to Medicare  beneficiaries.  In our work  on seat lift  chairs, 
discussed earlier, we found  that many seat lift  chairs were not being used for medical 
purposes, that 85 percent of the beneficiaries were initiating  the request for the item, 
and that most were learning  of these items through  aggressive mass marketing.55 
Similar  problems were identified  with  oxygen,56TENS  devices,57and power-
operated vehicles.58 Subsequent legislation  withdrew  coverage of seat-lift  chairs and 
reduced payment  rates for TENS.  Legislation  also required  the use of certificates of 
medical necessity, filled  out by the physician rather  than the supplier,  in order to 
better  ensure the medical necessity of these items.  We will  be reviewing the success 
of this initiative  in ensuring that only medically  necessary medical equipment  and 
supplies are provided  to Medicare  beneficiaries. 
13 
 Qzuz&y Concerns: ,The Medicare  program  relies on Peer Review Organizations 
(PROS), survey and certification,  accreditation  and licensing to ensure the quality  of 
care provided  to Medicare  beneficiaries.  Over time, we have expressed concern about 
the effectiveness of PRO review and the system gaps which leave many settings 
unregulated.  For example: 
In one study, we reviewed a random  sample of Medicare  hospital discharges 
b 	
and found that 6.6 percent of the patients received poor quality  care.59 This 
compared to the PROS finding  that only 0.8 percent of casespresented quality 
of care concerns.  We recommended  strengthening the PRO program  and 
issuing regulations to implement  a 1985 law giving PROS the authority  to deny 
Medicare  reimbursement  for patients receiving substandard medical care.  This 
regulation  has still not been published. 
PROS have reviewed millions  of inpatient  medical records to confirm  the 
necessity, quality,  and appropriateness of care rendered to Medicare 
beneficiaries.  The law requires PROS to refer casesto the OIG  for sanctions. 
This rarely occurs.  Only  12 caseswere referred  to the OIG  in fiscal year 
1992! 
We have identified  quality  of care problems when physicians travel to small 
b 	
rural  hospitals to perform  surgery.  These itinerant  surgeons are typically  not 
available for follow-up  care.  Our contract physicians found poor quality  care 
26.6 percent of the time.61 
Many  surgeries are now being performed  in physician offices.  We reviewed a 
b 	
sample of these procedures and found that medical records did not document 
reasonable quality  of care for  20 percent of the surgeries.62 
Medicare  has no quality  standards for independent  physiological laboratories 
b 	
that perform  ultrasound,  cardiac monitoring  and other non-invasive tests.  In 
many states these facilities  are not regulated.  We found that concerns about 
the quality  of these tests is pervasive.63 We recommended that HCFA 
promote  stronger quality  assurance but HCFA  declined, believing that we did 
not present convincing evidence of poor quality. 
In recent years, we among many others have expressed concern about the 
b 	
quality  of laboratory  testing.  The Clinical  Laboratory  Improvement 
Amendments  of 1988 (CLIA)  significantly  expanded Federal oversight of 
laboratory  testing.  The responsibility  for implementing  CLIA  falls to HCFA 
along with  the Public Health  Service.  We plan a series of studies to assessthe 
impact  of CLIA  on laboratory  testing and HCFAs  enforcement  of the statute. 
14 
 ADDRE!SSlNG  FINANCIAL  CONFLICIS  OF  INTEREST 
lk  Medicare program must addressjinancial  conjZc~ of interest which may lead to 

abuse. 

Physician ownership of and compensation from  entities to which they make referrals  is 

a practice that has received increasing attention  and concern.  In  1989, in the first 

national  study of its kind, we reported  that patients of referring  physicians who own or 

invest in independent  clinical  laboratories  receive 45 percent more clinical laboratory 

services than all Medicare  patients in general.64 Another  OIG  report  identified 

suspect financial  arrangements between hospitals and hospital-based physicians.65 

We found  that some hospitals are requiring  kickbacks from  these hospital-based 

physicians because they depend on hospitals for their  referral  of patients. 

Inappropriate  incentives can also be present in the financial  arrangements between 

different  physician specialties such as optometrists  and ophthalmologists.66 

Some steps have been taken to curtail  these financial  conflicts of interest and more 

have been proposed.  Legislation  has banned Medicare  payment for clinical  laboratory 

services ordered by physicians with  financial  ties to the laboratory.  Legislation  has 

been proposed to extend this ban to other types of providers. 

Under  the Medicare  and Medicaid  anti-kickback  statute, section 1128B(b) of the 

Social Security Act, it is illegal  to offer  or pay a profit  distribution  to physicians to 

deliberately  induce them to refer business payable under Medicare  or any State health 

care program.  Since 1987, we have received more than 1,300 allegations of violations 

of the anti-kickback  statute, and have opened over 850 cases. Close to 570 

convictions, settlements, and exclusions have been obtained  as a result of our 

investigations, as well  as almost $16 million  in recoveries.  As  an illustration,  our 

office initiated  civil proceedings against three limited  partnership  laboratories  and its 

principals  in The Inspector  General v. The Hanlester  Network,  et. al.  In this case, for 

the first  time, it has been established that a joint  venture scheme can violate  the anti-

kickback  statute. 

In  1991, the OIG  promulgated  final  safe harbor  regulations.  These regulations 

define for health care providers specific non-abusive business arrangements that will 

not be subject to prosecution  under the anti-kickback  statute.  These safe harbors may 

lead to a restructuring  of many joint  ventures.  We are in the process of sampling a 

variety of entities to identify  the effect of this regulation  on their  ownership and 

referral  patterns.67 

15 
 IMPROVING  MEDICARE  PAYMENT  SYSTEMS 
llze Medicare program must examine ia payment systemsto ensure that they are not 
vdnemble  to fraud  and abuse. 
Medicares  payment systems, implemented  by a network  of contractors, lead to some 
of the problems  cited above.  Other  examples bring home this point.  In one study, we 
found  that carriers were failing  to properly  verify the credentials or identity  of 
providers billing  Medicare  and that some ineligible  providers were receiving Medicare 
reimbursement.@ 69 We recommended  that HCFA: 
specify a minimum  framework  for provider  number  assignment to be followed 
by all carriers; 
consider implementation  of a system of user fees to defray the costs of provider 
number  assignment and maintenance; 
expand the Physician Registry to include nonphysician practitioners; 
require  the Physician Registry to provide feedback to carriers concerning all 
active practice records; 
ensure carrier  implementation  of HCFA  provider  number  assignment 
directives; 
require  carriers to update files regularly, deactivate all provider  numbers 
without  current  billing  history, and establish adequate controls to assure that 
providers not legally authorized  to practice are identified  and their  provider 
numbers deactivated. 
As a result of our reports, HCFA  has developed an action plan to improve  its 
management  of the provider  number  system.  We will  be scrutinizing this process to 
ensure that actions taken address the problems identified  in these reports. 
A further  concern to us is the network  of carriers and intermediaries  itself which 
process claims on behalf  of the Medicare  program.  Through  our work  on the 
Medicare  secondary payer issue, and oversight of claims processing environment, we 
believe that this system carries with  it inherent  conflicts of interest.  For example, a 
recent report  we issued on contractors for-profit  subsidiaries documents the practice 
of contractors requiring  the use of their  subsidiaries systems for the submission of 
claims to their  private  side of business, thereby disadvantaging other competitors 
marketing  other systems for  use in billing  the Medicare  program.70  In many MSP 
situations, the proper  payer is the contractors  private side of business, thereby 
reducing the incentive for the Medicare  contractor  to identify  the proper  primary 
payer. 
16 
 The performance  of Medicare  contractors is key to the successof the Medicare 
program.  Thus, HCFAs  oversight of its contractors is one of its highest priorities. 
Yet,  as discussed in this report,  we have documented  numerous instances in which 
guidelines established by HCFA  have not been adhered to.  A report  discussed earlier, 
in which we found half of the money paid out for total  parenteral  nutrition  to have 
been improperly  paid, is an example.71 Yet  it is worth  repeating  that in this instance 
only two carriers are responsible for processing the claims and certificates of medical 
necessity are required  to establish the medical need for the therapy.  Here  carrier 
personnel flagrantly  ignored the coverage guidelines and authorized  payments when 
the certificates  of medical  necessity were incomplete,  contradictory,  or clearly 
established need outside of the coverage guidelines.  Despite  these and other 
examples, the rating  of Medicare  contractors according to established performance 
indicators  are almost always extremely high.  We plan future  work  to assessthe 
performance  reviews of Medicare  contractors. 
Most  providers are now submitting  claims electronically  and new incentives now make 
electronic  submission of claims more attractive  to providers.  While we agree that the 
electronic  submission of claims will  reduce administrative  burden  and speed payment 
to providers, it may also create new opportunities  for fraud  and may make the 
detection  and prosecution  of fraud more difficult.  When erroneous payments are 
made they can now be repeated with  lightening  speed.  We will  not have the original 
documents to prove a case, but rather  a copy of the electronically-generated  form. 
Admissability  of this form  in court, as well  as manipulation  of the form,  may cause 
legal difficulties.  More  information  on this subject can be found  in our report, 
Electronic  Data Interchange:  Issues and Challenges. 
Finally,  providers may find ways to use the current  fragmented  system to their 
advantage.  When deciding where to submit their  claims, some medical equipment 
suppliers have shopped among the various Medicare  carriers to find  the highest 
reimbursement  rates or the most lax medical necessity standards.  Medicare  allows 
suppliers to submit claims wherever they receive the order.  By using call forwarding 
and other techniques providers can locate their  home office wherever they wish and 
bill  the carrier  of their  choice.  A  1991 report  found  that this policy cost Medicare  at 
least $22 million  in 1989.72 That  reports  analysis was limited  to a small portion  of 
durable medical  equipment.  HCFA  agreed with  our recommendations  and will  base 
pricing  and coverage decisions on the beneficiarys  residence. 
17 
 RECOMMENDATIONS 
As discussed in this report,  the problems and challenges facing the Medicare  program 
are substantial.  During  the course of our audits, inspections, and investigations in the 
Medicaid  program, we have made numerous specific recommendations  for change. 
Many of these recommendations  have been accepted by the Health  Care Financing 
Administration  and some have not.  Some require  legislative changes; others can be 
accomplished through  administrative  action. 
All  significant unimplemented  OIG  recommendations  are included  in one of two 
documents.  The Office  of Inspector  General Cost-Saver Handbook  (the Red Book)  is 
a compendium  of recent OIG  recommendations  to reduce unnecessary spending by 
the Department  through  administrative  or regulatory  change, or by the Congress and 
Administration  through  legislative change.  The Office  of Inspector General Program 
and Management  Improvement  Handbook  (Orange Book)  contains recent 
recommendations  for strengthening program  and management efficiency and 
effectiveness.  For our readers convenience, we have reproduced  our listing of 
recommendations  to improve  the Medicare  program  in the appendices to this report. 
To reduce the level of Medicare  fraud, waste, and abuse, the following  initiatives 
should be prominent  on policymakers  lists: 
Improve coding systems 
b 
The coding systems for physician services, medical equipment  and suppliers 
must accurately reflect  the services or items provided  and effectively combat 
gaming strategies such as unbundling. 
Base fee scheduleson the reasonable costsof ejjkient  providers 
b 
Reduce or eliminate  adjustments to hospital payments that are not 
b 	
warranted  by higher costs. 
Implement  a prospective payment system for outpatient  facility  services. 
b 
Base the practice cost portion  of the physician fee schedule on the 
b 	
current  overhead costs of efficient  providers. 
The durable medical equipment  fee schedules should be based on the 
b 	
cost of efficiently  providing  items, not historical  charges. 
b  Aggressivelyenforce MSP statue 
Provide more funding  for secondary payer activities 
b 
18 
 Improve  data collection  on spousal employment. 
b 
Authorize  and mandate additional  data matching programs. 
b 
Provide incentive programs for contractors to seek primary  payers. 
b 
Identjj,  and elbninate unnecessaryand inappropriate coveragevariations 
b 
Coverage decisions should be more consistent.  There  is little  reason to leave 
most decisions to local carriers.  This is a duplication  of effort.  It can lead to 
inequities  in coverage for beneficiaries  as well  as inappropriate  payments. 
Ensure the quality of medical services 
b 
When existing Federal and State regulations do not ensure that Medicare 
beneficiaries  are receiving high quality  medical  services, HCFA  should take 
steps to assure quality. 
Discourage jinancial  conjlicts of interests 
b 
When beneficiaries  are being referred  for additional  medical care, the 
beneficiary  needs to know that the reason for that service is their  true medical 
need and that the physician has no financial  incentive to order unnecessary 
services.  In choosing where to refer patients, beneficiaries  need to know that 
physician judgements  will  not be affected by financial  conflicts of interest. 
Strengthen Medicare systems 
F 
The HCFA  is considering implementation  of a new claims processing 
environment,  which we support.  The current  system may have fit  the 
environment  of the 196Os,but it needs to be revisited in light  of technological 
changes which allow for  electronic  submission, adjudication,  and payment, and 
medical  advances which have reduced variations  in medical practices. 
Develop payment alternatives 
b 
Medicare  must aggressively pursue ways of financing  care that create more 
incentives for the provision  of only necessary and appropriate  care.  Among  the 
methods chosen might  be managed care, prospective payments, and payments 
for  care conducted within  established practice guidelines. 
19 
 APPENDIX  A 

UNIMPLJ3MENTED  OIG  RECOMMENDATIONS: 
COST  SAVERS 
ANNUAL 
SAVINGS 
MILLIONS 
Medicare Reimbursement 
Tighten  Medicare  Coverage of Noninvasive Tests of the Lower 
b 	
Limbs  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $ 14 
Limit  Medicare  Part B Reimbursement  for Hospital  Beds  . . . . . . . . .  10 

Allow  Payment  for  Nonemergency  Advanced  Life  Support 

Ambulance  Services Only When Medically  Necessary . . . . . . . . . . . . .  16 

Apply  190-Day  Lifetime  Limit  for  Medicare  Inpatient 
b 	
Psychiatric Care and a 60-Day Annual  Limit  . . . . . . . . . . . . . . . . . . .  48 
Reduce Payments for Unnecessary and Poor Quality Upper  GI 

Endoscopies and Colonoscopies  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  55 

Reduce Payments for  Unnecessary and Poor Quality  Cataract 
b 	
Surgeries, and Associated Tests  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  51 
Reduce Monitored  Anesthesia Care Payments  . . . . . . . . . . . . . . . . . .  28 

Recover or Adjust  Medicare Credit Balances in Skilled Nursing 

Facility  Accounts  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13* 

Increase Fair Hearing  Threshold  . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10 

Raise the Medicare  Entitlement  Age to 67 . . . . . . . . . . . . . . . . . Billions** 

Medicare Secondary Payer 
F  Recover Past MSP Overpayments  . . . . . . . . . . . . . . . . . . . . . . . . . .  962* 
*One-time  recovery of savings. 
**  Savings would  be first  realized  in the year  2003.  Avoid  Future  MSP Overpayments  . . . . . . . . . . . . . . . . . . . . . . . . . . . 900 
b 
Expand MSP Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . More  than 
b 
$1 billion 
Hospitals 
Consider  Hospital  Profitability  in  the  Fourth  Year  of  the 
b 	
Medicare  Prospective Payment System . . . . . . . . . . . . . . . . . . . . . . .  610* 
Reduce Hospital  Capital  Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800 
b 
Reduce the Prospective Payment System Adjustment  Factor for 
b 
Indirect  Medical  Education  Costs . . . . . . . . . . . . . . . . . . . . . . . More  than 
$1 billion 
Deny  Medicare  Reimbursement  for  Patients  Who  Receive 
b 	
Substandard Medical  Care  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 
Modify  Payment Policy for Medicare  Bad Debts . . . . . . . . . . . . . . . . . 400 
b 
Limit  Prospective Payment System Reimbursement  for Hospital 
b 	
Admissions Not Requiring  an Overnight  Stay  . . . . . . . . . . . . . . . . . . . 210 
Reduce  Medicare  Payments  for  Hospital  Outpatient 
b 	
Department  Services  . . . . . . . . . . . . . . . . i . . . . . . . . . . . . . . . . . . . .  90 
Review Admissions for Hospital  Stays for Selected Diagnoses . . . . . . . 183 
F 
Recover Medicare Payments Made for Beneficiaries Eligible  for 
b 	
Other  Government  Health  Insurance  . . . . . . . . . . . . . . . . . . . . . . . . .  40* 
Recover Unallowable  Hospital  General and Administrative  and 
b 	
Fringe Benefit  Costs  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  2* 
Physicians Reimbursement 
Adjust  Physician  Fee  Schedule  Payments  Based  on  Site  of 
b 	
Service Differentials  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 
Establish  Mandatory  Prepayment  Edit  Screens for  Medicare 
b 	
and Medicaid  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  13 
Eliminate  Fragmented  Physician Claims  . . . . . . . . . . . . . . . . . . . . . . .  13 
F 
*One-time  recovery of savings. 
A-2  Roll Reimbursement  for Lab Services Into Charge for Physician 
b 
Office  Visit  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . More  than 
$1 billion 
End-Stage Renal Disease 
Further  Reduce Medicares  End-Stage Renal Disease Rates . . . . . . . .  22 
b 
Disallow  Bad Debts Reported  by National  Medical  Care, Inc  . . . . . . . .  3 
b 
Eliminate  Inappropriate  Payments  for  Total  Parenteral 
b 	
Nutrition  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  71 
Reduce the Reimbursement  Rate for Epogen  . . . . . . . . . . . . . . . . . .  28 
b 
Ikmdzu~  and Use of  Technology 
Change the Way Medicare  Pays for  Clinical  Laboratory  Tests . . . . . . . 426 
b 
Selectively  Contract  for  Coronary  Artery  Bypass  Graft 
b 	
Surgery  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...192 
Exclude  Medicare  Coverage  of  Conventional  Eye  Wear  for 
b 	
Beneficiaries  Having an Intraocular  Lens Implant  . . . . . . . . . . . . . . . .  72 
Revise Reimbursement  Rates for Low-Cost Ultrasound  . . . . . . . . . . . .  4 
b 
A-3 
 APPENDIX  B 
UNIMPLEMENTETD  OIG  RECOMMENDATIONS: 
PROGRAM  IMPROVEMENTS 
Medicare Contractor Operations 
Prevent Duplicate  Payments 
Review the Current Preprocedure Review Processto Determine 
Whether  It  is Cost-Effective 
Substitute  a  Targeted,  More  Intensive  Review  for  the 
Mandatory  Review of Cataract Surgery 
Document  Medicare  Part B Subcontract Procurements 
Reevaluate Procedures over Payment Safeguard Activities  and 
Take Steps to Assure that Savings Reported  Are  Accurate 
Conduct a Study To  Determine  the Feasibility  of a Reporting 
System which  Would  Distinguish  Between Savings 
Conduct  Demonstration  Programs to  Evaluate  Incentives  To 
Enhance the Recovery Medicare  Secondary Payer Payments 
Target  Working  Spouses and  the  Disabled  To  Increase  the 
b 
Cost-Effectiveness of the MSP Efforts 
Strengthen Home  Health  Care Payment Controls 
Physician and Other Services 
Require  Equitable  Distribution  of  Organs  among  Patients 
b 	
According  to Established Medical  Criteria 
Require  Carriers To Develop and Implement  a Claims Review 
b 	
Process  To  Apply  Existing  Monitored  Anesthesia  Care 
Coverage Instructions 
Issue Medicare  Coverage Guidelines  and Clarify  Independent 
b 	
Physiological Laboratory  Issues 
Initiate  Demonstration  Projects  to  Address  Problems  of 
b 
A- 1  Noncompliance  with  Prescription  Medications  among  the 
Ambulatory  Elderly 
Develop  National  Guidelines  for  Allocating  a Global  Fee for 
b 	
Cataract Surgery and Postoperative Care 
Add  Upper  GI  Endoscopies to the Peer Review Organization 
b 	
List  of Recommended  Review Procedures 
Intensify  Review of High  Volume  Ophthalmologists 
b 
Notify  Hospitals and Hospital-based Physicians about Potential 
b 	
Legal  Liability  Regarding  Other  than  Fair  Market  Value 
Agreements 
Inpatient Hospital  Services 
Test  the Effect  of  the  Essential Access Community  Hospital 
b 	
Program on Access to Care 
Determine  Quality  of Care of Itinerant  Surgery 
b 
Recover Overpayments to Itinerant  Surgeons for Postoperative 
b 	
Care 
Develop  Quality  of Care Criteria  for  Coronary  Artery  Bypass 
b 	
Graft  Surgery 
Accounting  System Controli 
Obtain  Guidance  on  Establishing  a  Proper  Cost  Allocation 
b 	
System 
Improve  the Cost Allocation  System 
b 
HCFA Administration 
Foster  Greater  Consistency Among  Carriers  on New  Health 
b 	
Care Technologies 
Strengthen the Monetary  Sanctions in PRO Program 
b 
Exercise Greater Fiscal Accountability  and Cost-Consciousness 
b 	
in the Kidney  Acquisition  System 
Prepare  the  Foundation  for  a  DRG  Incorporating  Kidney 
b 
B-2  Acquisition  and Transplantation 
Assisting States in Referring  Possible Fraud Cases to Medicaid 
Fraud Control  Units 
Establish  Standards  for  Health  Maintenance  Organization 
Marketing  and Enrollment  Practices 
Require  Ongoing  Training  of  Nurses  Aides  and  Orderlies, 
Regarding Recognizing and Reporting  Abuse 
Establish a Statewide Network  To Resolve and Follow  Up  on 
Abuse in Nursing Homes 
Require  Carriers to Periodically  Review and Update  Provider 
Records 
Develop  a  Disaster  Recovery  Plan  Identifying  HCRIS  as a 
Critical  Application  to be Recovered 
Resubmit  a Legislative Proposal to Facilitate  the Collection  of 
Medicare  Secondary Payer Information 
Require Employers to Report  Group Health  Plan Coverage on 
Form  W-2 
Revise Instructions and Medicare Claim Forms to Collect More 
Information  from  Beneficiaries 
Maintain  Accurate  Beneficiary  Spousal Information  for Use in 
MSP Activities 
Report  the Noncollection  of Timely  and Accurate  Information 
on Primary  Insurers of Medicare  Beneficiaries under MSP as a 
Material  Internal  Control  Weakness 
Work  with  DOJ  to  Implement  Controls  To  Combat  Drug 
Diversion 
B-3 
 APPENDIX  C 

ENDNOTES 
1.  Office  of Inspector  General Compendium  of Office  of Inspector General Reports 
on the Health  Care Financing Administration,  1992. 
2.  Office  of Inspector  General, Management  Advisory Report:  Manipulation  of 
Procedure Codes by Physicians to Maximize  Medicare  and Medicaid 
Reimbursements,  A-03-91-00019, September  1991. 
3.  Office  of Inspector  General, Changes are needed in the way Medicare  Pays for 
Clinical  Laboratory  Tests, A-09-89-00031 (Revised). 
4.  Office  of Inspector  General, Fragmented  Physician Claims, OEI-12-88-00901, 
September  1992. 
5.  Office  of Inspector  General, National  DRG  Validation  Study:  Special Report  on 
Coding Accuracy, OAI-12-88-01010, February  1988. 
6.  Office  of Inspector General, National  DRG  Validation  Study Update:  Summary 
Report,  OEI-12-89-00190, February  1992. 
7.  Office  of Inspector  General, Problems with  the Coding of Physicians Services: 
Medicare  Part B, OAI-04-88-00700, January 1989. 
8.  Office  of Inspector  General Medicare  Coverage of Seat Lift  Chairs, OAI-02-88-
00100, February  1989. 
9.  Office  of Inspector  General, Memorandum  for the Honorable  Richard  G. 
Darman,  Director,  Office  of Management  and Budget, May  14, 1992, p. 5. 
10.  Office  of Inspector  General, Pocket Dopplers:  Management  Advisory Report, 
OEI-03-91-00461, May  1991. 
11. 	 Office  of Inspector  General, Low  Cost Ultrasound,  OEI-03-88-01401, August 
1991. 
12.  Office  of Inspector  General, Zero  Crossers, OEI-03-91-00460, August  1991. 
13.  Office  of Inspector  General, Liver  Biopsies, OEI-12-88-00900, September  1992. 
14.  Health  Care Financing Administration,  1992 HCPCS Alpha-numeric  codes, 
(E0194),  1992, p. 80. 
C-l  15.  Office  of Inspector  General, Coding of Physician Services, OEI-03-91-00920 [An 
ongoing study.] 
16.  Office  of Inspector  General, Semiannual Report:  October  1, 1986 - March  31, 
1987, p. 49. 
17.  Office  of Inspector  General, OIG  Recommendations  Affecting  the Solvency of 
the Medicare  Trust  Funds, A-09-91-00099, June 1991, p. 10; (see also ACN:  14-
52018, ACN:  09-62003, A-09-87-00100 & A-07-88-001 11). 
18.  Office  of Inspector  General, OIG  Recommendations  Affecting  the Solvency of 
the Medicare  Trust  Funds, A-09-91-00099, June 1991, p. 10 (see also ACN:  14-
52083). 
19.  Office  of Inspector  General, OIG  Recommendations  Affecting  the Solvency of 
the Medicare  Trust Funds, A-09-91-00099, June 1991, pp. 11 - 12 (or A-14-90-00339). 
20.  Office  of Inspector  General, OIG  Recommendations  Affecting  the Solvency of 
the Medicare  Trust  Funds, A-09-91-00099, June 1991, p. 12; (or OAI-09-86-00076). 
21.  Office  of Inspector  General, Medicare  Cataract Implant  Surgery, OAI-85-1X-
046, March  1986. 
22.  Office  of Inspector  General, Medicare  Reimbursement  for Hospital  Outpatient 
Department  Services, A-14-89-00221, March  1991. 
23.  Office  of Inspector  General, Reimbursement  for  Outpatient  Facility  Services, 
OEI-09-88-01003, June 1991. 
24.  Office  of Inspector  General, Outpatient  Surgery Medical  Necessity and Quality  of 
Care, OEI-09-88-01000,  February  1991. 
25.  Office  of Inspector  General, Medicare  Carrier  Assessment of New Technologies, 
OEI-01-88-00010, April  1990. 
26.  Office  of Inspector  General, Medicare  Cataract Implant  Surgery, OAI-85-1X-
046, March  1986. 
27.  Office  of Inspector  General, Medicare  Certified  Ambulatory  Surgical Centers: 
Cataract Surgery Costs and Related  Issues, OAI-09-88-00490,  March  1988. 
28. 	 Office  of Inspector  General, Semiannual Report:  October  1, 1989 - March  31, 
1990, p. A-2. 
29.  Office  of Inspector  General, An  Overview of Intraocular  Lens Costs, OEI-07-89-
01664, June 1990. 
c-2  30.  Office  of Inspector  General, Cost-Saver Handbook:  The Red Book,  1992, p. G-
2. 
31.  Office  of Inspector  General, OEI  Workplan:  Fiscal Years  1993-1994, 1992 p. 
11. 
32.  Office  of Inspector  General, Medicare  Reimbursements  for At-Home  Oxygen 
Care, OEI-04-87-00017, December  1987. 
33.  Office  of Inspector  General Oxygen Concentrator  Reimbursement:  Medicare 
and the Department  of Veterans Affairs,  Management  Advisory  Report,  OEI-03-91-
00711, August  1991. 
34.  Office  of Inspector  General, Medicare  Part B Ambulance  Services, OAI-03-86-
00012, March  1987. 
35.  Office  of Inspector  General, Review of Backlog of Medicare  Secondary Claims, 
A-04-92-02057, December  1992 (Draft  Report). 
36.  Office  of Inspector  General, Review of the Accounts Receivable Balances for the 
Hospital  Insurance and Supplementary  Medical  Insurance Trust Funds as September 
30, 1991, A-01-91-00525, September  1992 (Draft  Report). 
37.  Office  of Inspector  General, Corrective  Action  Review of the Health  Care 
Financing Administrations  Medicare  Payment Safeguards Program, A-04-92-02037, 
August  1992. 
38.  Office  of Inspector  General, Review of Selected Part B Medicare  Secondary 
Payer Activities  at Blue Shield of Florida,  A-04-91-02004, April  1992. 
39.  Office  of Inspector  General, Review of AEtna  Life  Insurance Companys 
Compliance  With  Working  Aged Provisions of the Medicare  Secondary Payer 
Program, A-01-90,00509, February  1992. 
40.  Office  of Inspector  General, Medicare  Secondary Payer:  Effectiveness of First 
Claim  Development,  OEI-07-89-01683, August  1991. 
41.  Office  of Inspector  General, Medicare  as a Secondary Payer - Review of the 
Health  Care Financing Administrations  Efforts  to Implement  the Data Match 
Project, A-09-91-00103, August  1992. 
42.  Office  of Inspector  General, Medicare  Secondary Payer:  Effectiveness of First 
Claim  Development,  OEI-07-90-00763, November  1991. 
43.  Office  of Inspector, Extent  of Unrecovered  Medicare  Secondary Payer Funds, 
OEI-07-90-00760, August  1991. 
c-3  44.  Office  of Inspector  General, More  Complete  Employer  Group  Health  Plan 
Information  is needed to Administer  the Secondary Payer Program, A-09-91-00100, 
March  1990. 
45.  Office  of Inspector  General, Medicare  Secondary Payer:  Effectiveness of 
Current  Procedures, OEI-07-90-00761, August  1991. 
46.  Office  of Inspector  General, Retirees of Exempt  Government  Agencies Are  A 
Financial  Drain  on Medicare  Part A Funds, A-09-88-00072, February  1989. 
47.  Office  of Inspector  General, Amending  the Medicare  Secondary Payer Provision 
for  ESRD  Beneficiaries  Could Save the Medicare  Program $3 Billion  Over the Next 5 
Years, A-10-86-62016, December  1987. 
48.  Office  of Inspector  General, Medicare  Carrier  Assessment of New Technologies, 
OEI-88-00010, April  1990. 
49.  Office  of Inspector  General, OIG  Management  Advisory  Report:  Medicare 
Payments for  Outmoded  Procedures, OAI-12-89-01170,  November  1989. 
50. 	 Office  of Inspector  General, Transcranial  Dopplers,  OEI-03-91-00950, October 
1992 (Draft  Report). 
51. 	 Office  of Inspector  General, Identification  of New Technologies, OEI-Ol-91-
00230, (A  planned  study.) 
52.  Office  of Inspector  General, Medicare  Coverage and Reimbursement  for 
Monitored  Anesthesia Care, OEI-02-89-00050, November  1990. 
53.  Office  of Inspector  General, Ensuring Appropriate  Use of Laboratory  Service:  A 
Monograph,  OEI-05-89-89150, October  1990. 
54.  Office  of Inspector  General, Impact  of a Laboratory  Roll  In on Medicare 
Expenditures,  OEI-05-89-89151, June 1991. 
55.  Office  of Inspector  General Medicare  Coverage of Seat Lift  Chairs, OAI-02-88-
00100, February  1989. 
56. 	 Office  of Inspector  General,  Office  of Inspector  General, A-04-88-02058, March 
1990. 
57.  Office  of Inspector  General Transcutaneous Electrical  Nerve Stimulation  (TENS) 
Devices, OAI-02-88-00060,  July 1989. 
58.  Office  of Inspector  General Medicare  Coverage of Power-Operated  Vehicles, 
OAI-02-89-01110,  August  1989. 
c-4  59. 	 Office  of Inspector  General, National  DRG  Validation  Study:  Quality  of Patient 
Care in Hospitals,  OAI-09-88-00870, August  1989, p. 4. 
60.  Office  of Inspector General,  The Sanction Authority  of Peer Review 
Organizations,  OEI-01-92-00250, August,  1992 (Draft  Report). 
61.  Office  of Inspector  General, Itinerant  Surgery, OAI-07-88-00850, April  1989, p. 
11. 
62. 	 Office  of Inspector General,  Physician Office Surgery, OEI-07-91-00680, January 
1993 (Draft  Report). 
63.  Office  of Inspector  General, Quality  Assurance in Independent  Physiological 
Laboratories,  OEI-03-88-01400, October  1990. 
64.  Office  of Inspector  General, Financial  Arrangements  Between Physicians and 
Health  Care Businesses: Report  to Congress, OAI-12-88-01410, April  1989. 
65.  Office  of Inspector General, Financial  Arrangements  Between Hospitals  and 
Hospital-based  Physicians, OEI-09-89-00330, October  1991. 
66.  Office  of Inspector  General, Ophthalmology/Optometry  Relationships  Involved in 
Cataract Surgery, OAI-07-88-00460, April  1989. 
67.  Office  of Inspector  General, Compliance  with  the Safe Harbor  Regulations, 
OEI-04-92-00220 (Ongoing  study with  a final  report  expected in the last half of 1993.) 
68.  Office  of Inspector General, Carrier  Maintenance  of Medicare  and Provider 
Numbers,  OEI-06-89-00970, May  1991. 
69.  Office  of Inspector  General, Carrier  Assignment of Medicare  and Provider 
Numbers, OEI-06-89-00971, April  1992. 
70.  Office  of Inspector  General, Electronic  Media  Claims and Contractors  For-Profit 
Subsidiaries:  A Management  Advisory  Report,  OEI-12-91-01410, July 1992. 
71.  Office  of Inspector  General, Inappropriate  Payments for Total  Parenteral 
Nutrition  (TPN),  OEI-12-92-00460, December  1992 (Draft  Report). 
72. 	 Office  of Inspector General, Carrier  Shopping, OEI-05-91-00043, November 
1991. 
c-5