Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
Independent Physiological Laboratories: 
Vulnerabilities Confronting Medicare 
JUNE GIBBS BROWN 
Inspector General 
AUGUST 1998 
OEI-05-97-00240  OFFICE OF INSPECTOR GENERAL 
The mission of the Office of Inspector General (OIG), as mandated by Public Law 95-452, is to 
protect the integrity of the Department of Health and Human Services programs as well as the 
health and welfare of beneficiaries served by them.  This statutory mission is carried out through a 
nationwide program of audits, investigations, inspections, sanctions, and fraud alerts.  The 
Inspector General informs the Secretary of program and management problems and recommends 
legislative, regulatory, and operational approaches to correct them. 
Office of Evaluation and Inspections 
The Office of Evaluation and Inspections (OEI) is one of several components of the Office of 
Inspector General.  It conducts short-term management and program evaluations (called 
inspections) that focus on issues of concern to the Department, the Congress, and the public.  The 
inspection reports provide findings and recommendations on the efficiency, vulnerability, and 
effectiveness of departmental programs. 
OEI's Chicago Regional Office prepared this report under the direction of William C. Moran, 
Regional Inspector General, and Natalie Coen, Deputy Regional Inspector General.  Principal 
OEI staff included: 
REGION V  REGION III  REGION IV 
John Traczyk, Project Leader
 Nancy Molyneauz  Paula Bowker 
Ann Maxwell
 David Graf  Josiah Townsel 
Suzanne Johnson
 Brijen Shah  Peggy Daniel 
Charles Friedrich
 Linda Ragone  Graham Rawsthorn 
Nora Leibowitz
 Lauren McNulty 
Emily Melnick
 REGION IX 
Victoria Jacobs
 REGION I  Paul Gottlober

Russell Hereford  Robert Gibbons

REGION VI  Laura McBride  Don Loeb

Kristine Kenslow  Lynne Hostetter  Brad Rollin

Carrie Lozano

REGION VII  REGION II 
Timothy Dold  Jack Molnar  HEADQUARTERS 
Raymond Balandron  Lucille Cop  Wynethea Walker 
Daniel Ginsberg  Stuart Wright 
Barbara Tedesco 
To obtain a copy of this report, call the Chicago Regional Office at (312) 353-4124. 
Reports are also available on the World Wide Web at our home page address: 
http://www.hhs.gov/progorg/oei  E X E C U T I V E  S U M M A R Y

PURPOSE 
To identify program vulnerabilities associated with independent physiological laboratories and 
explore ways to safeguard the Medicare program from these vulnerabilities. 
BACKGROUND 
The Health Care Financing Administration (HCFA) defines an independent physiological 
laboratory (IPL) as an entity operating independent of a hospital, physician's office or rural health 
clinic.  Testing modalities performed by IPLs include, but are not limited to, neurological and 
neuromuscular tests, echocardiograms, ultrasounds, x-rays, pulmonary function tests, cardiac 
monitoring and nuclear medicine testing.  Initially, Medicare only covered diagnostic tests that 
were performed by a physician, hospital or other entity certified by the program to perform the 
test.  Beginning January 1979, HCFA decided that diagnostic services performed by IPLs 
qualified for Medicare reimbursement and began assigning provider numbers to IPLs.  To date, 
Medicare has issued approximately 5,000 unique IPL provider numbers.  Nearly $129 million was 
paid to IPL providers in 1996. 
The data and information presented in this report was gathered from 1996 Medicare claims data, 
onsite visits, interviews and telephone surveys involving 191 IPLs selected at random.  When 
available, we examined the enrollment applications and supporting enrollment documentation for 
the IPLs in our sample. 
FINDINGS 
One Out Of Five IPLs Authorized To Bill Medicare May Not Exist. 
We could not find a place of business for 39 of the 191 IPLs in our sample.  It is conceivable that 
some of these IPLs were legitimate businesses that closed during 1996 and before our visits in the 
spring of 1997.  However, in some cases it was clear that no IPL had conducted business at the 
site we visited for many years.  We also question whether 49 other provider numbers should have 
been assigned to the sites we visited that have no employees or equipment. 
The 39 IPLs we could not locate were paid about $800,000 in 1996 and 13 of them billed carriers 
in 1997.  Projected to the universe of all IPL provider numbers, nearly 1,000 of the 5,000 
provider numbers may have been assigned to entities that can no longer be located.  We estimate 
that, in 1996, Medicare could have paid about $11.6 million to IPLs that can no longer be located. 
Should a question arise as to the appropriateness of these payments, the Medicare program may 
not be able to locate these IPLs to resolve questionable claims information. 
Many Discrepancies Exist Regarding Patient And Physician Relationships. 
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i  Discrepancies between patient and physician zip codes could be an indication that some IPLs are 
misusing patient or physician identifiers.  Forty-three percent of the claims submitted by our 
sampled IPLs involved beneficiaries whose home zip codes clearly indicate that they and the 
referring physician resided in different States and in noncontiguous counties.  We believe that the 
distance involved would make it unlikely that the patient and the referring physician have a 
patient-doctor relationship. 
Our analysis also disclosed that 55 IPLs in our sample submitted claims using patient identifying 
information used by at least one other IPL.  In fact, more than 10 percent of their patients were 
also patients of at least one other IPL.  According to claims information, some patients were seen 
by 15 different IPLs doing business in at least 5 States.  The number of patients being seen by 
multiple IPLs in different States may be demonstrative of a program vulnerability. 
Provider Number Proliferation Adds To IPL Vulnerabilities. 
Of the 5,000 provider numbers issued to IPLs, we estimate that about 62 percent were not in use 
in 1996.  These inactive numbers, while dormant now, could become active in the future.  The 
more provider numbers that exist, the greater the chances are that their misuse will go undetected. 
For example, IPLs may obtain multiple provider numbers and use them to evade carrier utilization 
controls or to "shop" carriers for the greatest Medicare payment. 
A Large Number Of IPLs Appear Not To Meet HCFA's Definition Of Operating 
Independent. 
The HCFA defines an IPL as an entity operating independent of a hospital, physician's office or 
rural health clinic.  Seventy-seven out of the 191 IPLs in our sample are owned by, or affiliated 
with, a hospital, physician or rural health clinic.  Three out of four physicians or hospitals that had 
been given an IPL provider number by the carrier claimed they were not operating an IPL.  They 
claimed that they did not ask for an IPL provider number but were assigned a number by the 
carrier.  We believe that very few of the 77 physician/hospital owned IPLs in our sample are 
engaged in a business operation independent of their medical practice. 
RECOMMENDATIONS 
In conducting this study, we took into consideration new regulations affecting IPLs (now 
designated independent diagnostic testing facilities or IDTFs) that went into effect on January 1, 
1998.  We believe the new regulations may not adequately address the vulnerabilities described in 
this report.  Therefore, we offer the following options aimed at strengthening program safeguards: 
Clearly define the term "operating independent." 
Forty percent of the IPLs in our sample were owned by physicians and hospitals.  Moreover, three 
out of four do not consider themselves to be an IPL.  They provide diagnostic services primarily 
to their own patients.  Only physicians and hospitals that hold themselves out as providing 
diagnostic services to the community and who will not be involved in ongoing decisions affecting 
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ii  the care/treatment of patients referred to them should be enrolled as an IPL/IDTF. 
Establish a more stringent enrollment and verification process. 
All IPLs currently in the system should be re-enrolled.  The HCFA could fund onsite inspections 
to ensure that IPLs are at the business address they give carriers and that they have the 
equipment, trained personnel and physician supervision needed to participate in the Medicare 
program.  Carrier personnel should be trained to perform the enrollment, verification and onsite 
inspections of IPLs/IDTFs.  All IPLs/IDTFs could be required to post a surety bond prior to the 
issuance of a Medicare provider number. 
Strengthen the monitoring and control processes. 
This monitoring process should require carriers to audit a random sample of claims submitted by 
IPL/IDTF providers whose billing numbers have been inactive for 90 days or more.  The claims 
sample should be verified by contacting the referring physician or the patient.  Providers with no 
billing activity for more than 12 months should be required to re-enroll before payments are 
resumed. 
Completely reform the payment method. 
Another more far reaching option would be to eliminate direct payment to IPLs/IDTFs and pay 
the ordering physician.  The physician would then pay the IPL for services provided to his or her 
patients.  We believe this option would make it significantly more difficult for nonexistent IPL 
businesses to defraud the program and would eliminate most of the vulnerabilities described in this 
report. 
Moreover, this proposal recognizes the advantages to Medicare when services are bundled into 
payments to certain providers who are responsible for the overall care of patients.  It is analogous 
to recent payment policy changes involving skilled nursing facilities (SNFs).  The new policy 
requires SNFs to bill Medicare for all services provided to residents in their care and it prohibits 
payments directly to the subcontracted suppliers. 
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iii  AGENCY COMMENTS 
The HCFA and the Assistant Secretary for Management and Budget (ASMB) commented on this 
report.  The HCFA concurred with three of our four recommendations and plans to strengthen 
procedures related to IPL/IDTF provider enrollment, verification and monitoring as suggested in 
this report.  They did not agree with our far more reaching recommendation to change the way 
Medicare pays for IPL services.  The Assistant Secretary for Management and Budget concurred, 
with comment, on all four of our recommendations. 
Based on HCFAs and ASMBs comments, we made some changes and clarifications to the 
report.  The complete text of these comments can be found in Appendix A and B, respectively. 
Our response to their comments begins on page 10 of this report. 
We plan to re-examine this area in the future to see if HCFAs new regulations and current course 
of action reduces Medicares exposure to the vulnerabilities we have identified in this report. 
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iv  T A B L E  O F  C O N T E N T S

PAGE 
EXECUTIVE SUMMARY 
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Providers May Not Exist  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Patient/Physician Discrepancies  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Provider Number Proliferation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Definition Ambiguities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

RECOMMENDATIONS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

AGENCY COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

APPENDICES

A:  HCFA Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1

B:  ASMB Comments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
 I N T R O D U C T I O N

PURPOSE 
To identify program vulnerabilities associated with independent physiological laboratories and 
explore ways to safeguard the Medicare program from these vulnerabilities. 
BACKGROUND 
The Health Care Financing Administration (HCFA) defines an independent physiological 
laboratory (IPL) as an entity operating independent of a hospital, physician's office or rural health 
clinic.1  Testing modalities performed by IPLs include, but are not limited to, neurological and 
neuromuscular tests, echocardiograms, ultrasounds, x-rays, pulmonary function tests, cardiac 
monitoring and nuclear medicine testing.  Medicare pays an IPL for diagnostic services if:  (1) the 
IPL meets applicable State and local licensure laws, (2) the services are ordered by a physician, 
and (3) the services are reasonable and medically necessary.2 
Initially, Medicare only covered diagnostic tests that were performed by a physician, hospital or 
other entity certified by the program to perform the test.  In January 1979, HCFA determined that 
IPL services qualified for reimbursement and began enrolling and assigning provider numbers to 
IPLs.3 
Since 1979, the number of IPLs in the Medicare program has steadily increased.  In 1987, less 
than 1,700 IPL provider numbers had been issued.4  Today, there are approximately 5,000 
numbers, of which 1,100 have been issued by the Railroad Retirement Board (RRB) carrier.5  In 
1996, the Medicare program paid nearly $129 million to IPL providers. 
During a recent Office of Inspector General inspection of carrier fraud unit cases, we discovered 
that all of the IPL cases we reviewed involved potentially non-existent providers.  A common 
problem appeared to be unverifiable or false information (e.g. non-existent business addresses) on 
IPL provider enrollment applications.  The case file review also suggested that some IPLs 
obtained multiple provider numbers to avoid carrier medical necessity and utilization safeguards 
1 "Quality Assurance In Independent Physiological Laboratories," (OEI-03-88-1400), October 1990. 
2
 Medicare Carriers Manual, Section 2070.5 and Section 1862 (a)(1)(A) of the Social Security Act. 
3 The Health Care Financing Administration determined that IPL services qualified for reimbursement under 
Section 1861(s)(3) of Title XVIII of the Social Security Act. 
4 "Quality Assurance In Independent Physiological Laboratories," (OEI-03-88-01400), October 1990. 
5 Section 1842(g) of the Social Security Act, as amended, gives the Railroad Retirement Board the authority to 
separately contract with a carrier to process Medicare Part B claims for railroad retirement beneficiaries. 
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1  and to facilitate schemes to defraud Medicare.6  Based on problems discovered in our study of 
carrier fraud units and problems reported in a previously issued OIG report entitled, "Quality 
Assurance In Independent Physiological Laboratories," we decided to take a closer look at IPLs. 
The HCFA and its fiscal agents, the carriers, also recognized problems with IPL providers and 
have taken steps to address vulnerabilities presented by them.  In May 1996, prior to this study, 
HCFA implemented a new provider enrollment application (HCFA 855) that includes a special 
attachment for providers enrolling as IPLs.  This new enrollment application solicits information 
about the IPL's actual place of business/practice, testing modalities and ownership.  In addition to 
a new enrollment application, HCFA also formed a work group to review IPL policy and 
regulations. 
On October 31, 1997, HCFA published regulations that may ultimately eliminate the term "IPL." 
A new entity, independent diagnostic testing facilities (IDTFs), was created as of January 1, 1998. 
Entities currently participating in the Medicare program as IPLs must meet IDTF enrollment 
requirements, physician supervision requirements and personnel requirements set forth in the 
newly published regulations. 
METHODOLOGY 
The data and information presented in this report was gathered from:  (1) 1996 HCFA Part B 
claims data, (2) onsite visits, interviews and telephone surveys of IPLs, and (3) carrier IPL 
enrollment applications and supporting documentation. 
We requested from HCFA all of the 1996 IPL claims submitted to carriers for payment.  The 
HCFA returned a file containing approximately 1.3 million final action IPL claims and 2.3 million 
line items.  From this file we constructed a unique list of 2,818 IPL provider numbers used to 
submit claims in 1996.  We then selected 191 provider numbers from the 2,818 numbers using 
simple random sampling.  This sample size provides a confidence level of 95 percent with 7 
percent precision for estimates.  We also accessed HCFA's databases to locate the name and 
address of physicians who referred patients to each IPL and to identify patient residences. 
Each sampled provider number was sent to the carrier identified as having paid all, or most, of its 
claims.  We asked the carriers, including the RRB carrier, to provide the current business address 
and telephone number for each of our sampled IPLs.  In December 1997, we asked some carriers 
to provide 1997 payment data for some IPLs in our sample. 
We analyzed claim payment data and information on all 191 IPLs in our sample.  Interviews were 
conducted with 149 IPLs.7  While we analyzed data on all of the IPLs in our sample, we did not 
visit or contact IPLs under investigation.  Carriers were unable to provide identifying information 
6 "Carrier Fraud Units," (OEI-05-94-00470), November 1996. 
7 We were unable to interview 42 IPLs (39 could not be located and 3 refused to cooperate). This does not impact the 
statistical validity of our sample. It is, in itself, considered a finding of this report. 
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2  on four providers in the sample.  As with IPLs under investigation, we analyzed data on these 
IPLs but were unable to visit them. 
We reviewed all of the claims submitted in 1996 by the 191 IPLs in our random sample.  Our 
claims review looked at the number of claims submitted, distribution of referring physicians, 
whether the referring physician and patient resided close enough to have a patient-doctor 
relationship, the types of services billed, number of patients shared with other IPLs, service 
volume for time in business and nature of procedures being billed to Medicare. 
Between July 14, 1997 and September 30, 1997, we visited 139 IPL sites, in 25 States, indicated 
in the carriers' records as the principle place of business.  If the IPL was at the site we conducted 
an interview.  If the IPL was not at the site we left a letter asking them to call us to complete the 
interview.  We attempted to contact by telephone the IPLs we were unable to visit.  We also tried 
to reach, by telephone, all of the IPLs that were not at the place of business we visited.  During 
our interviews, we obtained information regarding:  practice locations, ownership structure, 
business arrangements, testing modalities, licensure, technician credentials, physician supervision 
and billing arrangements. 
Carriers that had assigned the provider numbers to our sample IPLs were also asked to provide 
copies of the provider enrollment applications.  We received copies of 134 provider enrollment 
applications and supporting documentation.  Carriers were unable to furnish the remaining 
applications for a variety of reasons. 
We conducted our inspection in accordance with the Quality Standards for Inspections issued by 
the Presidents Council on Integrity and Efficiency. 
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3  F I N D I N G S

One Out Of Five IPLs Authorized To Bill Medicare May Not Exist. 
We could not find a place of business for 39 of the 191 IPLs in our sample.  Twenty-seven were 
not at the site indicated in carrier records and we were unable to contact them by telephone. 
Another 12, not at the site we visited, told us that they had ceased operations or were no longer 
billing Medicare.  It is conceivable that some of these IPLs were legitimate businesses that closed 
during 1996 and before our visits in the spring of 1997.  However, in some cases (including some 
of the businesses that claimed they recently closed) it was clear that no IPL had conducted 
business at the site we visited for many years.  Our inability to locate these IPLs at the address 
Medicare has as their place of business may be an indication that they may not exist. 
The 39 IPLs we were unable to locate were paid about $800,000 in 1996.  At least 13 of these 
IPLs billed Medicare in 1997.  Projected to the universe of all IPL provider numbers, nearly 1,000 
of the 5,000 IPL provider numbers may have been assigned to entities that can no longer be 
located.  Based on our finding, we estimate that, in 1996, Medicare could have paid about $11.6 
million to IPLs that can no longer be located.8  Should a question arise as to the appropriateness 
of these payments, the Medicare program may not be able to locate these IPLs to resolve 
questionable claims information. 
In addition to not being at the site of record, one out of four IPLs could not be reached by 
telephone.  Telephone numbers in carrier files were incorrect, disconnected or not listed with 
directory assistance.  Our inability to reach the IPL or its principals may be an indication that they 
are not operating businesses. 
Some of the IPLs we talked to on the telephone may also not exist.  Unaware that we had visited 
their place of business, a few IPLs in our sample claimed they were doing business at the empty 
site we had recently visited.  Others, aware of our visit, claimed that the sites existed merely to 
meet Medicare requirements and that no business was actually transacted at the location. 
In addition to the 39 IPLs that may no longer exist, we found 49 other IPLs whose business 
address led us to a physician office, hospital or other medical establishment.  At some of these 
sites, they claimed that our sampled IPL was a truck, van or technician that would come to the 
site periodically to perform diagnostic services for their patients.  They claimed that on the day 
diagnostic services were being performed, the site was an IPL.  In some of these cases, the "IPL" 
had no equipment or personnel whatsoever, but subcontracted with another IPL to 
8 
At the 90 percent confidence interval the actual amount might lie between $4.5 million and $18.7 million. 
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4  provide equipment or personnel.  We have concerns about the Medicare practice of issuing 
provider numbers to businesses that have no permanent address or personnel or equipment. 
In at least 12 other cases, it was inconclusive as to whether or not we had actually reached, or 
conducted our survey with, the IPL identified in our sample.  In these instances, we believe that 
we were in contact with the IPL's billing service, a physician's office or another medical 
establishment.  While these entities had knowledge of the IPL, they did not appear to be the 
principles who completed the enrollment application.  At some physician offices, hospitals and 
other medical establishments, they claimed they were not an IPL and had no knowledge of the 
IPL in our sample.  Some of these sites appear to have been given an IPL provider number for 
carrier administrative purposes and both the IPL and carrier acknowledge the site is not an IPL. 
A serious program vulnerability exists when the Medicare program pays entities that cannot be 
located.  The inability to locate IPLs is not necessarily proof of intent to commit fraud, since it 
may indicate a problem with timely reporting or recording of change of address information. 
However, the extent of this problem documented in this study raises questions as to the legitimacy 
of many IPLs. 
Many Discrepancies Exist Regarding Patient And Physician Relationships. 
We examined the potential misuse of patient health insurance claim numbers by comparing zip 
codes of our sampled IPLs, their patients and referring physicians.  We found that 43 percent of 
the IPLs submitted claims involving beneficiaries whose home zip codes clearly indicated that they 
and the referring physician resided in different States.  Zip codes that bordered State lines were 
excluded to accommodate those areas in the country where people might regularly cross State 
lines to procure goods and services. 
The extent of patient-physician zip code discrepancies cannot be attributed entirely to patients 
who change their residence seasonally.  The distance involved would make it unlikely that the 
patient and the referring physician have a patient-doctor relationship.  It appears that, at a 
minimum, many of these claims would not meet HCFA's current requirement that the ordering 
physician be the physician who treated the patient.9 
Our analysis of zip codes also disclosed that 29 percent of IPLs in our sample submitted claims 
using patient identifying information used by at least one other IPL.10 In fact, more than 10 
percent of their patients were also patients of at least one other IPL.  According to claims 
information, some patients were seen by 15 different IPLs doing business in at least 5 States. 
9 The November 22, 1996 final rule for the 1997 Physician's Fee Schedule (61 CFR 59490), revised 410.32 to state 
that, to be covered, diagnostic tests had to be ordered by the physician who treats the patient. 
10 We modeled our analysis after the methodology proposed by Malcolm K. Sparrow in: "License To Steal: Why 
Fraud Plagues America's Health Care System," Westview Press, 1996. 
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5  There are plausible explanations as to why different IPLs provide service to the same 
beneficiaries, and to explain how the referring physician's practice and the patient's home are 
hundreds of miles apart.  For example, patients may need multiple diagnostic services that can not 
be provided by a single IPL.  In other cases, the billing for the diagnostic service may have been 
split with one IPL billing for the technical component (the performance of the test) while another 
bills for the professional component (the interpretation of the test results).  The data may also 
reflect, to some degree, the mobility of today's elderly patients. 
However, discrepancies between patient and physician zip codes could also be an indication that 
Medicare might be vulnerable to IPLs that misuse patient or unique physician identifiers called 
UPINs that are readily available to the public.  The apparent lack of a clear patient-doctor 
relationship and the extent of patient sharing, particularly across State lines, clearly deserves 
closer scrutiny. 
Provider Number Proliferation Adds To IPL Vulnerabilities. 
Another vulnerability is created by the sheer number of provider numbers issued by Medicare 
carriers.  There are at least 5,000 provider numbers assigned to IPLs.  Our analysis indicates that 
62 percent of these numbers are not being used to bill Medicare.  These inactivate provider 
numbers can be activated at any time.  In most cases, an IPL simply has to submit a claim. 
The more provider numbers that exist, the greater the chances are that their misuse will go 
undetected and the easier it becomes to evade carrier utilization controls and program safeguards. 
For example, it is impossible to compile a complete billing history for an IPL when claims are 
submitted under a variety of provider numbers to carriers in different States.  We found that 
carriers are often unable to associate or cross-reference numbers being used by the same IPL 
provider. 
The 191 IPLs in our sample hold at least 500 provider numbers in different program specialties 
used for billing.  When IPLs offer portable x-ray services, clinical laboratory services or medical 
supplies, they are issued a separate provider number for each type of services.  Each carrier, 
including the RRB carrier, issues its own provider numbers; therefore, IPLs doing business in 
several States have different provider numbers for each State.  Physicians who own IPLs also 
have separate provider numbers for their individual and group medical practice sites.  It also 
appears that separate IPL numbers have been assigned to some physicians billing for the 
professional component of a diagnostic test performed by an IPL.  Virtually all of the problems 
and vulnerabilities discussed in previous OIG work on provider numbers were found to apply to 
IPLs.11 
11 "Carrier Maintenance of Medicare Provider Numbers," (OEI-06-89-00870), May 1991, and "Carriers Still Need 
To Purge Unused Provider Numbers," (OEI-01-94-00231), December 1995. 
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6  Contributing to potential vulnerabilities associated with excessive provider numbers are the 
provider numbers generated by the RRB carrier.  In the universe of IPL provider numbers in 
1996, 23 percent of the numbers were duplicate RRB numbers.  While the RRB enrollment 
application requires the IPL to first obtain and then furnish the RRB with the local Medicare 
provider number, the RRB does not cross-reference this number in any database.  The RRB also 
does not verify this number with the local carrier other than to check it against the list of 
providers and persons barred from participating in the Medicare program.  Therefore, the number 
is only retrievable directly from the RRB's enrollment application.  To retrieve this information 
would require an extensive manual search of boxed files.  Likewise, the other carriers do not 
cross-reference their numbers with RRB numbers nor with other local carrier numbers. 
A Large Number Of IPLs Appear Not To Meet HCFAs Definition Of Operating 
Independent. 
The HCFA defines an IPL as an entity operating independent of a hospital, physician's office or 
rural health clinic.  In our sample, 77 IPLs (40 percent) indicated that they were owned by 
physicians, hospitals or rural health clinics.  Fifty-nine IPLs are owned, wholly or in part, by a 
physician or a group of physicians.  Eleven are owned wholly, or in part, by a hospital and five are 
joint ventures involving both hospitals and physicians.  Two IPLs appeared to be affiliated with a 
rural health clinic.  The number of IPLs owned wholly, or in part, by physicians represents a 7 
percent increase over previous estimates.12 
Neither regulation or policy defines the meaning of operating independent.  Therefore, we could 
not determine whether ownership, in itself, violates the intent, if not the spirit, of HCFA's policy. 
Three out of four IPLs owned by physicians or hospitals claimed they were not an IPL.  Most of 
these IPLs  provided diagnostic services primarily to their own patients.  They do not hold 
themselves out as providing diagnostic services to the community.  They have active medical 
practices and seemed perplexed as to why their Medicare carrier assigned them another provider 
number to bill for diagnostic services they provide primarily to their own patients. 
Overall, at least 123 of the 187 identifiable IPLs in our sample are affiliated with some other 
health care provider billing Medicare.  These businesses include:  durable medical equipment 
companies, clinical laboratories, pharmacies, hospitals, physician office practices and home health 
agencies. 
12 "Financial Arrangements Between Physicians and Health Care Businesses, Report to Congress," 
(OA-12-88-01410), May 1, 1989. 
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7  R E C O M M E N D A T I O N S

When conducting this inspection, we took into consideration new regulations affecting IPLs (now 
designated independent diagnostic testing facilities or IDTFs) that went into effect on January 1, 
1998.  We believe the new regulations may not adequately address the vulnerabilities described in 
this report; therefore, we offer the following options aimed at strengthening program safeguards: 
Clearly define the term "operating independent. 
The HCFA should clearly define the term operating independent.  Forty percent of the IPLs in our 
sample were owned by physicians and hospitals.  Moreover, three out of four do not consider 
themselves to be an IPL.  They provide diagnostic services primarily to their own patients.  Only 
physicians and hospitals that hold themselves out as providing diagnostic services to the 
community and who will not be involved in ongoing decisions affecting the care/treatment of 
patients referred to them should be enrolled as an IPL/IDTF. 
Establish a more stringent enrollment and verification process for IPLs/IDTFs this could 
include the following: 
<  an unannounced visit to the IPL/IDTF business site(s) prior to issuing a provider number; 
<	 provide adequate funding for enrollment and verification processes by either setting aside 
operating funds or collecting application fees; 
<	 periodically re-enroll all IPLs/IDTFs in the system using the same procedures used to 
enroll new providers; 
<	 verify documentation and information furnished by IPLs/IDTFs through third-party 
sources; 
<  train carrier personnel performing the enrollment, verification and onsite inspections; and, 
<	 require all IPLs/IDTFs to post a surety bond prior to the issuance of a Medicare provider 
number. 
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8  Strengthen the monitoring and control processes. 
<	 Require carriers to audit new IPL/IDTF claims before an initial payment is made.  A 
random selection of claims should be validated by contacting the referring physician or the 
patient.  The existence of a patient-physician relationship should also be established during 
this initial audit; 
<  Provide adequate funding for ongoing monitoring activities; 
<  Conduct periodic unannounced revisits to IPL/IDTF businesses; 
<	 Require carriers to flag for claim review IPL/IDTF provider numbers that have not been 
used for 90 days.  Numbers not used for 12 months should be removed from the system 
and canceled.  Those IPLs/IDTFs whose billing numbers have been canceled should be 
required to re-enroll; and, 
<	 Take steps to ensure that the carrier servicing the jurisdiction where the beneficiary 
receives services processes all IPL/IDTF claims. 
We recognize that establishing more stringent enrollment and verification processes and 
strengthening monitoring processes may be resource intensive.  We did examine other options 
that might address the vulnerabilities we found.  We believe that the most cost-effective option 
and administratively simple approach would be to: 
Completely reform the payment method. 
This option would eliminate direct payment to IPLs/IDTFs and pay only the ordering physician. 
The physician would be responsible for paying the IPL and any other subcontractors for 
diagnostic services provided to his or her patients.  We believe this option would make it 
significantly more difficult for nonexistent IPL businesses to defraud the program and would 
eliminate most of the vulnerabilities described in this report. 
Moreover, this proposal recognizes the advantages to Medicare when services are bundled into 
payments to certain providers who are responsible for the overall care of patients.  It is analogous 
to recent payment policy changes involving skilled nursing facilities (SNFs).  This new policy 
requires SNFs to bill Medicare for all services provided to residents in their care and it prohibits 
payments directly to the subcontracted suppliers.  Our recommended change in IPL/IDTF 
payment policy would also eliminate vulnerabilities inherent in the split billing option that enables 
multiple providers to bill for different parts of the same service. 
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9  A G E N C Y  C O M M E N T S 
 
We would like to thank HCFA and the Assistant Secretary for Management and Budget (ASMB) 
for commenting on the draft of this report.  The full text of each agencys comments can be found 
in Appendix A and B, respectively. 
The HCFA concurred with three of our four recommendations and plans to strengthen procedures 
related to IPL/IDTF provider enrollment, verification and monitoring as suggested in this report. 
They did not agree with our more far reaching recommendation to change the way Medicare pays 
for IPL services. 
Based on HCFAs comments, we have made changes and clarifications to the report.  We 
simplified our recommendation that HCFA clearly define operating independent.  We recognize 
that HCFA plans to address this issue but felt that further clarification was needed. 
Most of the physicians and hospitals we visited claimed they were not an IPL.  We did find some 
physicians and hospitals that do, in fact, hold themselves out as providing diagnostic services to 
the community and agree with HCFA that these businesses rightfully should be enrolled as IDTFs. 
However, we do oppose assigning IPL provider numbers to physicians, hospitals and rural health 
clinics that do not hold themselves out to other physicians as an IPL/IDTF.  Physicians and 
hospitals that own their equipment, provide staff (or subcontract for staff) and provide most of 
their services to their own patients should not be given an IPL/IDTF provider number.  Assigning 
multiple numbers to providers who perform services within the scope of their license or 
certification greatly increases the risk of inappropriate payments and is administratively 
burdensome. 
Based on HCFAs comments, we eliminated three options and changed the wording of another 
concerning how to strengthen the monitoring and control processes.  Our initial suggestion was 
that HCFA mandate that the carrier servicing the jurisdiction where the beneficiary resides 
process all IPL/IDTF claims.  We have changed this option to reflect HCFAs position that, 
...the locality in which the service is furnished determines carrier jurisdiction.... 
The HCFA did not agree with our far more reaching recommendation to reform the IPL payment 
method.  They believe it would make more sense to implement our other recommendations before 
attempting to reform the payment method. 
In response to HCFAs comment we would like to point out that our proposed payment reform 
does not create a new payment method or a new fee schedule but relies on the physician fee 
schedule that currently exists to determine Medicares payment amount for the diagnostic services 
billed by physicians.  While we are not changing our recommendation, we recognize that there 
may be other payment mechanisms that may be useful in controlling the vulnerabilities described 
in this report. 
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10  The ASMB concurred with our recommendations but expressed concern about the cost 
effectiveness of establishing more stringent enrollment and verification procedures and 
strengthening the monitoring processes.  The ASMB also wanted to know how our proposal to 
completely modify the payment method for IPL services would address the potential for 
physicians to mark-up prices and engage in inappropriate referrals and kickback activities. 
We believe that reforming the current payment mechanism would be the most cost-effective way 
to reduce abuses and resolve problems Medicare has experienced with nonexistent IPLs. 
The potential for kickbacks would be greatly reduced, if not eliminated, when Medicare pays the 
ordering physician.  Physicians will have little or no incentive to offer kickbacks to 
subcontractors, since physicians (and not providers whose existence depends on physician 
referrals) would control the ordering and the funds generated from their orders.  Some physicians, 
currently using IPLs, may increase their use of services.  Having all of the claim information about 
a physicians use of diagnostic services on their billing history greatly enhances carrier ability to 
identify physicians whose use of diagnostic services differs from that of their peers. 
The potential for duplicate payments would be greatly reduced because physicians would be 
required to bill globally.  The physician would be paid for the technical and professional 
components of any diagnostic test.  It would be more difficult to defraud the program.  Since all 
bills would come from the ordering physician the likelihood of billing for services not rendered or 
misrepresenting services would be significantly reduced.  Moreover, it would ensure that the 
patient and physician have a valid patient-physician relationship.  It would enhance Medicares 
ability to detect overutilization and to recover overpayments resulting from medically unnecessary 
services or excessive services.  Unlike IPLs, it is more difficult for physicians to simply close up 
shop and leave Medicare with uncollectible overpayments. 
In their technical comments HCFA noted that we have failed to, ... cite a single example of a test 
that was not actually furnished as billed by an IPL, or that was not medically necessary for the 
beneficiary who received the service.  It is true that we did not determine the medical necessity 
of IPL services nor did we calculate overpayments based on inappropriate payments.  That was 
not the purpose of our study. 
We believe that carriers are already familiar with cases involving unnecessary or undelivered IPL 
services.  The purpose of our study was to identify and better understand the program 
vulnerabilities associated with IPLs and explore ways to safeguard the Medicare program from 
these vulnerabilities. 
Moreover, we believe there is ample evidence available in our reports to substantiate these 
problems should HCFA wish to examine the evidence. 
Our report entitled Independent Physiological Laboratories:  Carrier Perspectives (OEI-
05-97-00241), provides information from the carriers about IPLs falsifying physician 
orders, misrepresenting patient diagnosis, double billing, unbundling services, carrier 
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11  shopping and over utilizing patient services.  They also found non-existent IPLs. 
Our analysis indicated that many of the IPLs in our sample might be involved in fraudulent 
or abusive billing activities and that some IPLs may not exist at all.  We advised HCFA of 
potential problems involving some IPLs in our sample.  We then asked our own Office of 
Investigations (OI) to review the information we had developed on some IPLs.  Some of 
the information we provided to OI was subsequently forwarded to field agents for 
investigation.  Other information will be sent to the Medicare carriers for further 
development.  A decision will then be made whether to undertake a full-scale investigation 
or pursue administrative actions, such as overpayment determinations and collections. 
Our work in this area is continuing.  In addition to the investigative and administrative referrals 
mentioned above, we plan to re-examine this area in the future to see if HCFAs new regulations 
and current course of action reduces Medicares exposure to the vulnerabilities we have identified 
in this report. 
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12  A P P E N D I X  A

Health Care Financing Administration 
Comments on the Draft Report 
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A - 1         A P P E N D I X  B

Assistant Secretary for Management and Budget 
Comments on the Draft Report 
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B - 1