Department  of  Health  and Human  Services 
OFFICE  OF 
INSPECTOR  GENERAL 
MEDICARE  PREPAYMENT  REVIEW-

FAIR HEARINGS 

Richard  P.  Kusserow 
INSPECTOR  GENERAL 
OEI-07-8941680  EXECUTIVE  SUMMARY 
PURPOSE 
The purpose of the inspection  is to determine  where improvements  can be made in 
the fair  hearings process under the Medicare  Part B program. 
BACKGROUND 
Private insurance companies, referred  to as carriers, contract with  the Health  Care 
Financing Administration  (HCFA).  Carriers process and pay claims under the 
Medicare  Part B program.  The Part B program  covers physicians services, outpatient 
hospital  care, and other medical costs. The patient,  physician, practitioner,  or supplier 
may file  a Medicare  claim, with  payment made either to the beneficiary  or on his 
behalf  to the provider  of the service.  For disputed claims, a claimant  under the 
Medicare  Part B program  can request a fair  hearing by the carrier if the amount  in 
controversy is $100 or more, or if payment is not made promptly. 
We reviewed 210 fair  hearings casesclosed in Fiscal Year  (FY)  1989.  We grouped 
carriers by fair  hearing reversal rates and the volume  of claims processed during 
three quarters of FY  1989.  We then selected a sample of carriers from  each group. 
. 
FINDINGS  - . * 
Ihe  $100 thrdwki  for  a fair  hearing ir low compared to various injlation  hdict3. 
b 
Ihe HCFA  does not require caniim  to adjust reported cost savingsdue to fair 
b 	
hearing reversalsof mdcal  net@  &mid  edits. 
Some caniim  may not be correctly reporting cost savingsdue to hearing reversals. 
b 
RECOMMENDATIONS 
The HCFA  should seek l&i&ion  to herease the $100 thrahoki  amount for  a fair 
b 	
hearing and the threshok& for subquent  leveLrof appeoL 
l%e HCFA  should require that car&m  adjust for fair  hearing revemaLrof medical 
b 	
nece  denial edit screens. 
The HCFA  should assurethat car&m  adjwt  for fair  hearing reversal of HCFA 
b 	
mandated and canier inihhted &it  screens. 
i  We did not receive comments from  HCFA  on the draft  of this report. 
We received comments on the draft  of this report  from  the Assistant Secretary for 
Planning and Evaluation.  They fully  concurred with  our recommendations.  The 
complete  text of their  comments are contained in Appendix  D. 
ii  TABLE  OF  CONTENTS 
EXECUTIVE  SUMMARY..........................................  i 
INTRODUCTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1 
FINDINGS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 
RECOMMENDATIONS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  7 
COMMENTS  ON THE  DRAFT  REPORT  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 
APPENDIX  A - Consumer Price Index (CPI)  and Fair Hearings 
Administrative  Cost, 1973 TO  1990  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  A-l 
APPENDIX  B - Estimated  Annual  Budget Savings Based Upon 
Increased Fair Hearing  Threshold  Amounts  . . . . . . . . . . . . . . . . . . . . . . . . .  B-i 
APPENDIX  C - Estimated  Total  Amount  of Fair Hearing 
Reversals of Medical  Necessity Denial  Edits Not Adjusted  From 
The Quarterly  Carrier  Medical  Review Reports, Fourth  Quarter  of 
Fiscal Year  1989  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  C-l 
APPENDIX  D - Assistant Secretary for Planning and 
Evaluations  Comments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . D-l  INTRODUCTION 
PURPOSE 
The purpose of the inspection is to determine  where improvements  can be made in 
the fair  hearings process under the Medicare  Part B program. 
BACKGROUND 
The Medicare  program  provides hospital and medical care for beneficiaries under two 
separate programs identified  as Part A and Part B.  The Part A program  provides 
coverage for hospital  services. The Part B program covers physician services, 
outpatient  hospital services, and other medical services and supplies. 
The Health  Care Financing Administration  (HCFA)  administers Medicare.  The 
HCFA  is responsible for  developing program policy, setting standards, and assuring 
compliance with  Federal  legislation and regulation.  The HCFA  contracts with  private 
insurers, referred  to as carriers, to administer  Medicare  Part B benefits. 
As part of their  contract with  HCFA,  carriers process and pay Medicare  Part B claims 
for services. The carriers determine  the reasonable charges for services provided  and 
assure that payments to physicians and suppliers are only for covered and medically 
necessary-services. The HCFA  monitors  carriers performance  through  the annual 
Contractor  Performance  Evaluation  Program (CPEP). 
The HCFA  requires each carrier  to set up and conduct fair  hearings.  A fair  hearing is 
an impartial  review of a disputed claims decision by a carrier employee or 
subcontractor.  The procedure  allows a beneficiary  enrolled  under Part B the 
opportunity  for a fair  hearing if the claimed amount in controversy is $100 or more, or 
if payment  is not made promptly  and the request is filed within  six months of the 
initial  notice.  One claim, or a combination  of claims for the beneficiary  totaling  $100 
or more, will  meet this threshold  requirement. 
Physicians or suppliers under the Part B program  may also request a fair hearing. 
Decisions which can be appealed include: coverage of items and services, application 
of the deductible,  whether  the charges for items and services are reasonable, the 
medical necessity of services and supplies, and whether  the beneficiary,  physician, or 
supplier  knew or could reasonably have been expected to know that the items or 
services were excluded from  coverage.  When the appeal for a fair  hearing is by a 
physician or supplier,  the claims of more than one beneficiary  may be combined to 
meet the $100 threshold. 
The carriers use three methods to conduct fair hearings.  These are: on-the-record, 
telephone,  and in-person hearings.  In  1988, HCFA  revised the appeals process to 
1  provide  for  the expanded use of on-the-record  fair  hearings where the evidence in the 
file  is the basis for the decision.  The beneficiary,  physician, or supplier  chooses the 
method  of the fair  hearing.  If  dissatisfied with  the fair  hearing decision, they may also 
appeal by: 
requesting a hearing by an Administrative  Law Judge (ALJ)  of the Social 
b 	
Security Administration  within  60 days following  a carriers fair  hearing decision 
which involve denied amounts of $500 or more; 
requesting a Departmental  Appeals  Council  review if dissatisfied with  an ALJ 
b 	
decision or dismissal; and, 
bringing  a civil suit in U. S. District  Court  of an appeals council decision which 
b 	
involves a denied amount  of $1000 or more. 
For the Fiscal Year  (FY)  1989 review period  (October  1, 1988, to September 30, 
1989), Medicare  carriers workload  was as follows: 
Percentage (%)  of Claims  Hearing  Hearing 
Claims Volume  Denied  or Reduced  Decisions  Reversals (%I 
410,700,ooo  17.5 %  47,881  26,726 (55.8 %) 
There were 66,802 fair  hearing casescleared in FY  1989 as a result of either  a hearing 
decision, hearing dismissal, or hearing withdrawal. 
m 
METHODOXDGY- *. 
We randomly  selected a sample of eight carriers from  all carriers.  We used data 
available from  two overlapping  periods for the sample selection.  The method  used to 
select the sample was a two-stage stratified  cluster sample.  The carriers were divided 
into  a.matrix  of four  categories based on the reversal rate of fair  hearings and the 
volume  of claims processed for payment during the period  October  1988 to June 1989. 
The reversal rate of fair  hearings is the percentage of reversals in relation  to the totals 
for the period  October  1988 through  July 1989. 
We grouped the carriers either  above or below the respective median value of the 
carriers volume  of claims and reversal rates.  The resulting four  categories of carriers 
were as follows: 
High volume  of claims and high reversal rate 
b 
b  High  volume  of claims and low reversal rate 
b  Low volume  of claims and high reversal rate 
b  Low volume  of claims and low reversal rate 
2 
 We selected two carriers meeting the criteria  within  each of the four  categories.  The 
carriers selection was directly  proportional  to the volume of claims processed. 
We dropped  one of the eight carriers from  our review when we became aware of a 
civil suit brought  by the Federal government.  The civil suit alleged the carrier 
improperly  administered  the Medicare  program. 
We randomly  selected thirty  fair  hearing casesclosed during the FY  1989 period  from 
each of the sample carriers.  After  selection, we reviewed the casesfor the appeal 
issues, the amount  in controversy, and the decision.  In addition,  for reversals, we 
determined  if there was an audit trail  to the carrier savings report.  We also held 
discussions with  personnel at each of the seven carriers who were responsible for 
operation  of Medicare  Part B fair hearings.  We questioned staff about the fair 
hearings process, cost of conducting fair hearings, program weaknesses, and 
recommendations  for improvements. 
3 
 FINDINGS 

IXE  $100 THRESHOLD  FOR A FAIR  HEARING  IS LOW  COMPARED  TO 
VARIOUS LiWLAT7ON  lNDKES. 
The U.S. Congress amended the review and hearing procedures under the Part B 
Medicare  program,  Section 1842(b)(3)(C)  of the Social Security Act.  This section of 
the law became effective in FY  1973. The section imposes a threshold  of $100 or 
more before  an individual  qualifies for a fair hearing under the Medicare  Part B 
program.  This threshold was established to avoid administrative  burdens for Medicare 
claims hearings involving  small amounts. 
The threshold  amount  of $100 has not changed in the past eighteen years.  During  the 
same period,  however, there have been substantial increases in several related 
measures such as medical and general costs and the administrative  costs associated 
with  the fair  hearing (APPENDIX  A).  Because the threshold  is proportionately  small 
as compared  to these other costs, it is no longer achieving its purpose of precluding 
hearings for  negligible  dollar  value claims. 
The effect has been a skyrocketing fair  hearings workload.  As reported  by HCFA,  the 
number  of fair  hearings has increased substantially since passage of the law.  The 
following  chart on Carrier  Fair  Hearings shows a progressive increase in the number 
of fair  hearings from  9,384 recorded in FY  1973 to 101,246 in FY  1990. 
.m 
CARRIEK  FAIR  HEARINGS 
APPEALS  CLEARED 
7s  74  7s  rn  77  7a  7a  00  o- SO  W  #4  DS  W  07  00  08  SO 
FISCAL  YEARS  CFfJ  19?3  TO  1990  We estimate that 26.2 percent of the fair  hearing casesin FY  1989 involved claimed 
amounts in controversy that were less than the average fair  hearing administrative  cost 
of $224 for the seven carriers sampled.  This is more than  17,500 of the 66,802 fair 
hearing cases cleared in FY  1989. 
The increase in workload  correlates with  an increase in administrative  expenditures to 
process fair  hearing requests.  For example, the HCFA  budget for carrier fair 
hearings in FY  1990 was more than $16 million.  This is up from  the previous years of 
FY  1989, FY  1988, and FY  1987 when the budgets were more than $14 million, 
$11 million,  and $8 million,  respectively (APPENDIX  A). 
The administrative  cost of $224 to process a fair hearing is more than twice the 
current  threshold.  The Medical  Consumer Price Index (MCPI)  and the Consumer 
Price Index (CPI)  are 4.2 and 2.9 times greater than they were in 1973, respectively. 
Applying  these ratios to the $100 fair hearing threshold would  support an increase to: 
(1) $400, an amount  that corresponds to the MCPI;  (2) $300, an amount that 
corresponds to the CPI; or (3) $225, the amount that corresponds approximately  to 
the administrative  cost of a fair  hearing. 
We estimate from  the number  of FY  1989 fair hearings at the sample carriers that 
HCFA  could have achieved administrative  budget savings ranging from  almost 
$4 million  dollars to over $6 million  dollars by raising the threshold  of $100 by the 
following  amounts (APPENDIX  B): 
Proposed  Fair Hearing  Budget 
Threshold  Amount  Estimated  Annual  Savines 
$400  $6,269,675 
$300  $5,671,989 
$225  $3,995,987 
THE HCFA  DOES NOT REQUIRE  CARRlERS  TO ADJUST REPORlED  COST 
SAWNGS DUE  TO FAIR  HEdRING  REVERSALS  OF MEDKXL  NECESSlTY 
DENM  WITS. 
Carrier  prepayment  claim edits are designed to ensure that Medicare  pays only for 
medically  necessary services. These consist of Category I and Category II  screens. 
Category I screens are medical necessity denials, and Category II  screens are HCFA 
mandated  and carrier  initiated  computer  edits.  The carriers submit reports to HCFA 
on savings achieved using these screens. When a carrier  denies a claim for lack of 
medical  necessity, it is claimed as a savings. For example, a denial of payment for a 
seat lift  chair is a claimed savings in the period  it is denied.  Savings identified  through 
the use of prepayment  screens are used by HCFA  to evaluate contractors.  Carriers 
must meet, or exceed, a five dollar  savings to a one dollar  cost from  prepayment  and 
postpayment  review to receive a satisfactory CPEP evaluation by HCFA. 
5 
 We identified  fair  hearing reversals totalling  $18,876 which involve screen denials in 
Category I.  While  the Medicare  Part B Carriers Manual  (MCM),  Part 3, Section 
7536.2, requires an adjustment  for fair  hearing reversals of Category II  screen denials, 
HCFA  does not require  carriers to make subsequent adjustments for fair  hearing 
reversals of Category I screen denials.  Based on this amount, we project  reversals 
totalling  almost $4.4 million  that would  have reduced claimed savings in the fourth 
quarter  of FY  1989 (APPENDIX  C).  Assuming equal amounts for the remaining 
3 quarters of the year, this projects to $17.5 million  for  the year. 
SOME  G4R.RlER.S hUY  NOT BE CORRECZZY  REPOR7TNG  COST SAVINGS  DUE 
TO H-G  REWRSALS. 
The MCM  requires an adjustment  for Category II  reversals.  All  carriers reviewed, 
except one, had a process to reduce carrier  savings by subtracting from  it the 
monetary  value of the fair  hearing reversals of Category II  prepayment  screens. The 
medical review section of that carrier  did not consider it their  responsibility  to adjust 
Category II  savings for fair  hearing reversal decisions after completion  of the review. 
The manager stated that the carriers manual instruction  was vague concerning 
adjustment  of fair  hearing reversals from  Category II  savings. The potential  exists, 
since one of seven carriers did not adjust savings as a result of fair  hearing reversals, 
that other  carriers may not correctly reduce savings as a result of fair  hearing 
reversals.  RECOMMENDATIONS 
7HE HCFA  SHOULD  SEEK LEGISLAlTON  To  INCREASE  THE $100 
lHRE!JHOLD  AMOUNT  FOR A Fm  HEARlNG  AND  THE  llXUESHOLDS  FOR 
SUBSEQUENTLEWLS  OFAPPEALa 
The HCFA  should pursue a legislative initiative  to raise the fair  hearing threshold. 
Alternatives  to the current  threshold  include the following  suggestions. 
Increase the threshold  amount to $225 which is approximately  equal to the 
b 	
administrative  cost to conduct a fair hearing at the seven carriers sampled. 
Projected  savings would  be $3995,987 (APPENDIX  B).  The threshold should 
be indexed to the administrative  cost of a fair hearing.  This would  achieve 
greater savings in future  years. 
Increase the threshold  amount to $300 which approximately  reflects the 
b 	
increase in the CPI since 1973. Projected savingswould  be $5,671,989 
(APPENDIX  B).  The threshold should be indexed to the CPI in future  years. 
Increase the threshold  amount  to $400 which approximately  reflects the 
b 	
increase in the MCPI  since 1973. Projected savings would  be $6,269,675 
(APPENDIX  B).  The threshold should be indexed to the MCPI  in future 
years. 
Increase the Part B thresholds for requesting an ALJ  hearing and other levels 
b 	
of appeal proportionally. 
THE HCFA  SHOULD  REQUIRE  Tli%T  CLIRRIERSADJUST  FOR F&R  HEARllvG 
R.EK?XW!S  OF MEDICAL  NECESSITY  DENLLiL  EDIT  SCREENS. 
The HCFAs  instructions  to carriers should require  adjustment  of reported  medical 
necessity denial edits in the quarterly  period when the fair hearing reversals occur. 
There were approximately  $17.5 million  in savings that should have been adjusted 
from  the claimed savings in FY  1989 due to fair hearing reversal decisions. 
Z-HE HCFA  SHOULD  ASSURE  TK4T  CARRIERS ADJUST FOR FAIR  HEARING 
REWRSALS  OF HCFA  MANDATED  AND  CARRIER  INmTED  EDIT  SCREENS. 
The HCFA  should assure that all carriers adjust affected savings after a fair hearing 
reversal.  This adjustment  should be made in the quarterly  period when the fair 
hearing reversal occurs.  The HCFA  should also review the clarity  of the MCM 
section that pertains to the handling  of these savings. 
7 
 COMMENTS  ON  THE  DRAFT  REPORT 
We did not receive comments from  HCFA  on the draft  of this report. 
We received comments on the draft  of this report  from  the Assistant Secretary for 
Plating  and Evaluation.  They fully  concurred with  our recommendations.  The 
complete  text of their  comments are contained in Appendix  D. 
8 
 APPENDIX  A 

CONSUMER  PRICE  INDEX  (CPI)  and 
FAIR  HEARINGS  ADMINISTRATIVE  COST 
1973 TO  1990 
Carrier  Fair Hearings 

Medical  Administrative  Cost(2) 

Year  CPI(1)  CPI(1)  (in millions\ 

1973  44.4  38.8  Not Available  (NA) 

1974  49.3  42.4  NA 

1975  53.8  47.5  NA 

1976  56.9  52.0  NA 

1977  60.6  57.0  NA 

1978  65.2  61.8  NA 

1979  72.6  67.5  NA 

1980  82.4  74.9  NA 

1981  90.9  82.9  NA 

1982  96.5  92.5  NA 

1983  99.6  100.6  NA 

1984  103.9  106.9  NA 

1985  -107.6  113.5  NA 

1986 
1987  110193..66   113202..11   K3 

1988  118.3  138.6  $11.8 

1989  124.0  149.3  $14.3 

1990  130.7*  162.8**  $16.4 

*  The  1990 CPI is over 2.9 times greater than the 1973 Index. 
**  The  1990 MCPI  is almost 4.2 times greater than the 1973 Index. 
SOURCES: 
(1) 	 The  CPI is from  the Office  of Management  and Budget Consumer Price 
Index Table  B-58 CPI. Maior  Expenditure  Classes. 
The  1988, 1989 and 1990 CPI and the Medical  CPI are from  the 
Economic  Renort  of the President, Februarv  1991. 
(2) 	 Carrier  Fair Hearings Administrative  Costs for  1987, 1988, 1989, and 
1990 represent costs (HCFA  Fair Hearings Cost Data from  Carriers 
Final  Administrative  Cost Pronosal). 
A -1 
 APPENDIX  B 
ESTIMATED  ANNUAL  BUDGET  SAVINGS 

BASED  UPON 

INCREASED  FAIR  HEARING  THRESHOLD  AMOUNTS 

Proposed 
Threshold  95 Percent Confidence  Interval  Estimated 
Amount  Lower  Estimate  - UDDer Estimate  Budget Savings 
$400  $4,49&013  $8,041,337  $6,269,675 
$300  $3,756,611  $7,587,367  $5,671,989 
$225  $3,387,682  $4,604,292  $3,995,987 
The budget savings calculations are based on the varying thresholds within  each strata 
utilized  in drawing the sample of carriers.  We estimated the amount  of savings within 
the sample based on the average cost per request and the number  of casesbelow the 
threshold.  We projected  these estimated -savingswithin  each strata, and summed the 
amounts to obtain  the total  for each threshold. 
.
+. 
B-l  APPENDIX  C 
ESTIMATED  TOTAL  AMOUNT 
OF FAIR  HEARING  REVERSALS 
OF MEDICAL  NECESSITY  DENIAL  EDDX 
NOT  ADJUSTED  FROM  THE  QUARTERLY 
CARRIER  MEDICAL  REVIEW  REPORTS 
FOURTH  QUARTER  OF FISCAL  YEAR  1989 
Sample  Estimated 
Strata (1)  Savinfzs  Weight  (2)  Total  Amount 
I  $4,758.30  .487  $1,993,141.63 
II  $1,850.90  .351  $1,870,323.02 
III  $9,395.60  .083  $  338,053.76 
Iv  $2,872.00  .079  $  181,422.12 
Totals  $18,876.80  $4,382,940.53 
At  the 95 percent confidence level, this estimate may vary by as much as $1.1 million. 
Therefore,  the estimated fair  hearing reversals of medical necessity denial edits range 
from  $3.3 - $5.5 million. 
(1) 	 Strata I Carriers with  high volume of claims and high reversal rate 
Strata II  Carrier  with  high volume of claims and low reversal rate 
Strata III  Carriers with  low volume of claims and high reversal rate 
Strata IV  Carriers with  low volume of claims and low reversal rate 
(2)  This represents the proportion  of claims processed by the various strata. 
C-l  APPENDIX  D 
ASSISTANT  SECRETARY  FOR 
PLANNING  AND  EVALUATION 
COMMENTS 
D-l  DEPARTMENT  OF HEALTH  & HUMAN  SERVIbS  iiF,CEitrED  Officeof the Secretary 
Gff!CE  Of  iyiT3zC:  [SF 
- -.  .-.s  . 
Washington,DC.  20201 
TO: 	 Richard  P.  KusserOW 
Inspector  General 
Office  of  Inspector  General 
FROM: 	 Assistant  Secretary  for 
Planning  and  Evaluation 
SUBJECT: 	 OIG  Draft  Report:  "Medicare  Prepayment  Review  - Fair 
Hearings"  (OEI-07-89-01680)--CONCURRENCE 
I  concur  with  the  draft  Office  of  Inspector  General  (OIG)  report
entitled  "Medicare  Prepayment  Review  - Fair  Hearings"  which 
recommends  that  the  Health  Care  Financing  Administration  (HCFA)
seek  legislation  to  increase  the  $100  threshold  amount  for  fair 
hearings  and  subsequent  levels  of  appeal. 
I  also  concur  with  the  report's  recommendation  that  HCFA require
carriers  to  adjust  claimed  savings  for  fair  hearing  reversals  of 
medical  necessity  denial  edits  and  assure  that  carriers  adjust
for  fair  hearing  reversals  of  HCFA mandated  and  carrier  initiated 
edit  screens. 
If  you  have  any  questions,  please  contact  Elise  D.  Smith  at 
245-1870.