Department  of  Health  and Human  Services 
OFFICE  OF

INSPECTOR  GENERAL 
DESIGN  FLAWS  IN THE  MEDICARE

INCENTIVE  PAYMENT  PROGRAM

ManagementAdvisory  Report 
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OEI-01-93-00051  OFFICE  OF  INSPECTOR  GENERAL 
The  mission of the  Office  of Inspector  General  (OIG),  as mandated  by Public  Law 95-452, as 
amended,  is to protect  the  integrity  of the Department  of Health  and Human  Services (HHS) 
programs  as well as the  health  and welfare  of beneficiaries  served  by those  programs.  This 
statutory  mission  is carried  out  through  a nationwide  network  of audits,  investigations,  and 
inspections  conducted  by three  OIG  operating  components:  the  Office of Audit  Services,  the 
Office of Investigations,  and the Office  of Evaluation  and Inspections.  The  OIG  also informs 
the Secretary  of HHS  of program  and  management  problems  and recommends  courses  to 
correct  them. 
OFFICE  OF  AUDIT  SERVICES 
The  OIGS  Office  of Audit  Services  (OAS)  provides  all auditing  services  for HHS,  either  by 
conducting  audits  with its own audit  resources  or by overseeing  audit  work done  by others. 
Audits  examine  the  performance  of HHS  programs  and/or  its grantees  and contractors  in 
carrying out  their  respective  responsibilities  and are intended  to provide  independent 
assessments  of HHS  programs  and operations  in order  to reduce  waste,  abuse,  and 
mismanagement  and to promote  economy  and efficiency throughout  the  Department. 
OFFICE  OF  INVESTIGATIONS 
The  OIGS  Office  of Investigations  (01)  conducts  criminal,  civil, and administrative 
investigations  of allegations  of wrongdoing  in HHS  programs  or to HHS  beneficiaries  and of 
unjust  enrichment  by providers.  The  investigative  efforts  of 01  lead to criminal  convictions, 
administrative  sanctions,  or civil money  penalties.  The  01  also oversees  State  Medicaid  fraud 
control  units which  investigate  and prosecute  fraud and patient  abuse  in the  Medicaid  program. 
OFFICE  OF  EVALUATION  AND  INSPECIIONS 
The  OIGS  Office  of Evaluation  and Inspections  (OEI)  conducts  short-term  management  and

program  evaluations  (called  inspections)  that  focus on issues of concern  to the  Department,

the Congress,  and  the  public.  The  findings and  recommendations  contained  in these  inspection

reports  generate  rapid,  accurate,  and  up-to-date  information  on the efficiency, vulnerability,

and effectiveness  of departmental  programs.

This report  was prepared  under  the  direction  of Mark  R. Yessian,  Ph. D., Regional  Inspector

General,  and Martha  B. Kvaal, Deputy  Regional  Inspector  General,  Boston  Region,  Office of

Evaluation  and Inspections.  Participating  in the  project  were  the following  people:

Boston  Headquarters

David R. Veroff,  Project Leader  Hugh  Hetzer,  Program Specialist

David Schrag, Lead  Analyst

For adddimal  copies of this rep~  please contact the Boston regional ofice  by telephone at 
(617) 565-1050,  or@  Fax at (617) 565-3751.  Department  of  Health  and Human  Services 
OFFICE  OF 
INSPECTOR  GENERAL 
DESIGN  FLAWS  IN THE  MEDICARE

INCENTIVE  PAYMENT  PROGRAM

Management  Advisory  Report 
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OEI-01-93-OO051  EXECUTIVE  SUMMARY 
PURPOSE 
To  identify  design  flaws  in the  Medicare  incentive  payment  program  for  physicians  in 
Health  Professional  Shortage  Areas. 
BACKGROUND 
The  Omnibus  Budget  Reconciliation  Acts  of  19S7 and  1989  provide  bonus  payments 
for  physicians  who  treat  Medicare  patients  in Health  Professional  Shortage  Areas 
(HPSAS).  The  payments  are  intended  to  serve  as incentives  to  attract  new  physicians 
to  HPSAS  and  to  retain  physicians  already  practicing  there. 
Having  reviewed  the  program,  we  recommend  in  a companion  report  that  the  Health 
Care  Financing  Administration  (HCFA)  seek  to  target  the  program  to  primary  care 
physicians.  Nonetheless,  the  program  will  still  be  vulnerable  to  fraud  and  waste  and 
will  likely  fail  to  achieve  its  goals  unless  a number  of  concerns  are  addressed.  We  are 
issuing  this  Management  Advisory  Report  to  bring  those  concerns  to  the  attention  of 
HCFA  and  the  Congress. 
FINDINGS 
Because  the  availability  of specialists  is not  considered  in the  HPSA  designation 
process,  Medicare  may  be  paying  incentives  to  specialists  who  are  not  in  short  supply. 
Because  HPSAS  represent  entire  communities  with  physician  access  problems  but  the 
Medicare  program  is focused  on  the  elderly,  Medicare  may  not  be  paying  incentives  to 
physicians  who  are  in short  supply. 
Physicians  are  eligible  to  receive  Medicare  bonus  payments  even  when  they  treat 
patients  who  do  not  live  in  HPSAS. 
The  instability  of HPSA  designation  over  time  means  that  the  incentive  payments 
cannot  be  counted  on  to  retain  physicians  in particular  areas  for  the  long  term. 
The  complex  method  of establishing  eligibility  for  incentive  payments  makes  effective 
financial  controls  very  difficult,  leaving  the  program  vulnerable  to  inappropriate 
payments. 
CONCLUSION 
If the  incentive  payment  program  continues  in its  present  or  a modified  form,  we 
believe  the  design  of  the  program  warrants  review  to  ensure  that  the  program  is a 
logical  mechanism  for  accomplishing  its  purported  goals.  The  HCFA  will  have  to 
i  ensure  that  all  cost-effective  measures  are  taken  to  prevent  inappropriate  use  of 
incentive  payment  funds. 
COMMENTS  ON  OUR  DRAFT  REPORT 
We  solicited  comments  on  a draft  of this  Management  Advisory  Report  along  with  our

draft  inspection  report,  Medicare  Incentive  Payments  in  Health  Professional  Shortage

Areas,  OEI-01-93-00050,  from  the  Health  Care  Financing  Administration  (HCFA),

the  Public  Health  Service,  the  Assistant  Secretary  for  Planning  and  Evaluation

(ASPE),  the  Assistant  Secretary  for  Management  and  Budget,  the  Assistant  Secretary

for  Legislation,  and  the  Physician  Payment  Review  Commission.  We  received

comments  from  HCFA  and  ASPE  that  are  reproduced  in  the  final  inspection  report

issued  in  June  1994.

ii  TABLE  OF  CONTENTS

EXECUTIVE  SUMMARY

INTRODUCITON  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..1

FINDINGS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

  Incentive  payments  to  physicians  not  in short  supply  . . . . . . . . . . . . . . . . .  2

  No  incentives  to  physicians  truly  in  demand  . . . . . . . . . . . . . . . . . . . . . . .  2

  Lack  of  residency  requirement.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...3

  No  guarantee  of  long-term  incentives  . . . . . . . . . . . . . . . . . . . . . . . . . ...3

  Vulnerability  to  inappropriate  payments  . . . . . . . . . . . . . . . . . . . . . . . . . .  4

CONCLUSION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

COMMENTS  ON THE  DRAFI  REPORT  . . . . . . . . . . . . . . . . . . . . . . . . . . . ...6

APPENDIX  Notes  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..A-l  INTRODUCTION 
PURPOSE 
To  identify  design  flaws  in the  Medicare  incentive  payment  program  for  physicians  in 
Health  Professional  Shortage  Areas. 
BACKGROUND 
The  Omnibus  Budget  Reconciliation  Acts  of  1987  and  1989  provide  bonus  payments 
for  physicians  who  treat  Medicare  patients  in Health  Professional  Shortage  Areas 
(HPSAS).l  In  Calendar  Year  1992,  these  payments  amounted  to  $68  million  and  were 
distributed  to  nearly  22,000  physicians  .2  The  payments  are  intended  to  serve  as 
incentives  to  attract  new  physicians  to  HPSAS  and  to  retain  physicians  already 
practicing  there.3 
The  Office  of  Inspector  General  recently  conducted  an  inspection  to  determine 
whether  the  bonus  payments  were  effective  in furthering  the  Federal  governments 
interest  in improving  access  to  primary  health  care.  In  the  report  resulting  from  that 
inspection,*  we  raise  serious  doubts  about  the  payments  contribution  to  that  goal. 
We  recommend  in  that  report  that  the  Health  Care  Financing  Administration  (HCFA) 
seek  to  target  the  program  to  primary  care  physicians.  Nonetheless  the  program  will 
still  be  vulnerable  to  fraud  and  waste  and  will  likely  fail  to  achieve  its  goals  unless  a 
number  of  concerns  are  addressed.  We  are  issuing  this  Management  Advisory  Report 
to  bring  these  concerns  to  the  attention  of HCFA  and  the  Congress. 
Information  for  this  Management  AdvisoV  Report  was  drawn  from  several  sources. 
They  include  research  conducted  by all  three  branches  of the  Office  of  Inspector 
General,  reports  from  the  Physician  Payment  Review  Commission  and  other 
government  agencies,  and  Federal  laws  and  regulations. 
This  report  was  prepared  in  accordance  with  the  Quality  Standards  for  Inspections 
issued  by  the  Presidents  Council  on  Integrity  and  Efficiency. 

Medicare  Incentive  Payments  in Health  Professional  Shortage  Areas,  OEI-Ol-93-
00050,  June  1994. 
1  FINDINGS

Because  the  availability  of specialir~r  ir not  considered  in the HPSA  desi~ation  process, 
Medicare  may  be paying  incentives  to speciali~t.s who  are not  in short  supply. 
HPSAS  were  created  to  identify  eligible  placement  sites  for  physicians  who  are 
obligated  to  serve  in the  National  Health  Service  Corps  (NHSC).  The  NHSC, 
administered  by  the  Public  Health  Semite  (PHS),  provides  scholarships  and  loan 
repayments  to  providers  of  primary  health  care  in underserved  areas.  In judging 
whether  an  area  qualifies  as  a HPSA,  PHS  calculates  the  ratio  of population  to 
primary  care  physicians.4  Primary  care  physicians  include  doctors  of  medicine  and 
osteopathy  in  the  fields  of general  or  family  practice,  general  internal  medicine, 
pediatrics,  and  obstetrics/gynecology.  5  The  presence  of physicians  in  other  fields  has 
no  effect  on  HPSA  designation. 
Because  of the  way  HPSAS  are  designated,  Medicare  is paying  additional  money  to 
attract  and  retain  specialists  in areas  where  there  may  be  a sufficient  number  or  even 
a surplus  of specialists.  Because  rural  HPSAS  generally  encompass  entire  population 
centers  such  as  counties,  it may  be  reasonable  to  assume  that  they  suffer  from 
shortages  of specialists  as well  as  primary  care  physicians.  Urban  HPSAS,  however, 
may  be  small  areas  such  as  census  tracts.  The  distribution  of  physicians  within  urban 
areas  may  leave  these  HPSAS  with  shortages  of  primary  care  physicians  but  high 
concentrations  of specialists.  Many  inner-city  HPSAS  that  are  unattractive  to  office-
based  primary  care  physicians  include  large  hospitals.  Those  hospitals  attract  large 
numbers  of specialists,  and  those  specialists  earn  incentive  payments  for  providing 
services  within  the  hospitals. 
All  physicians  services  provided  in HPSAS  count  toward  the  incentive  payments.  This 
establishes  an  incentive  for  physicians  in HPSAS  to  provide  all  types  of  procedures, 
even  those  that  are  prone  to  overuse. 
Because  HPSAs  represent  entire  communities  with physician  accem  problems  but  the 
Medicare  program  ir focused  on the  elderly,  Medicare  may  not  be paying  incentives  to 
physicians  who  are in short  supplj. 
In  defining  HPSAS,  the  PHS  strives  to  identify  areas  whose  citizens  have  inadequate

access  to  health  care.  In  addition  to  calculating  population-to-physician  ratios,  PHS

considers  some  indicators  of health  status.  Specifically,  areas  with  more  than  100

births  per  1,000  women  aged  15-44  or  with  more  than  20  infant  deaths  per  1,000  live

births  are  considered  to  have  unusually  high  needs  for  primary  medical  care

services.b  To  address  these  needs,  the  PHS  allows  these  areas  to  maintain  lower

population-to-physician  ratios  than  is usually  required  for  HPSA  designation.

Presumably,  the  types  of  physicians  most  needed  in these  areas  are  obstetricians  and

pediatricians.  Yet  these  physicians  are  unlikely  to  treat  many  Medicare  patients,  so  a

Medicare  incentive  payment  program  is unlikely  to  help  attract  or  retain  them  there.
 At  the  same  time,  there  could  be  areas  of  the  country  with  sufficiently  large  numbers 
of obstetricians  and  pediatricians  to  prevent  the  areas  designation  as  HPSAS,  but  with 
severe  shortages  of physicians  trained  in providing  care  to  the  elderly.  In  these  areas, 
Medicare  enrollees  could  have  serious  problems  obtaining  access  to  medical  care,  but 
the  lack  of HPSA  designation  would  prevent  using  the  incentive  payment  program  to 
attract  more  physicians. 
Physicians  in HPSAS  are eli~ble 10 receive  Medicare  bonus  payments  even  when  they 
treat patients  who  do  not  live in HPSAS. 
The  ultimate  goal  of  the  incentive  payment  program  is to  improve  the  health  status  of

residents  of areas  with  shortages  of  physicians.  The  payments,  in theory,  would

motivate  physicians  to  locate  offices  close  to  needy  patients  rather  than  having  patients

travel  long  distances  to  see  physicians.  But  the  law  specifies  that  bonus  payments  shall

be  made  for  all  physicians  services  provided  within  HPSAS,  not  just  those  provided  to

HPSA  residents.

Physicians  in  rural  HPSAS  probably  do  not  see  many  non-HPSA  residents  because  of

the  long  travel  times  that  would  be  involved.  But  urban  areas  are  different,  because

HPSAS  and  non-HPSAs  are  in close  proximity  and  well-known  hospitals  attract

patients  from  within  a broad  radius.  Thus  it is likely  that  a number  of  physicians  are

receiving  bonus  payments  even  when  they  are  providing  services  to  people  who  have

no  trouble  gaining  access  to  physicians.

The  HCFA  does  not  know  what  percentage  of  patients  treated  by  physicians  who

receive  incentive  payments  live  in HPSAS.  It is not  required  to  record  this

information,  and  the  cost  and  difficulty  of  collecting  the  information  prevents  it from

doing  so voluntarily.

l%e instabiliq  of HPSA  desipation  over  time  means  that  the  incentive  payments  cannot 
Be counted  on  to retain  physiciam  in particular  areas for  the  long  term. 
The  PHS  reviews  each  HPSAS  status  periodically.  If new  physicians  are  attracted  to  a 
HPSA,  their  presence  may  bring  the  population-to-primary-care-physician  ratio  below 
the  ratio  necessary  for  HPSA  status.  This  would  lead  to  withdrawal  of  the  HPSA 
designation  at  the  next  review.  In  October  1992,  the  most  recent  date  for  withdrawing 
HPSA  designations,  81  of the  approximately  1800  HPSAS  lost  their  HPSA  status.7 
Withdrawal  of HPSA  designation  would  lead  to  the  elimination  of incentive  payments 
for  physicians  in that  area.  This  could  prompt  the  departure  of  physicians  who  were 
attracted  to  HPSAS  by the  incentive  payments.  The  threat  of withdrawal  also  creates 
an  incentive  for  physicians  currently  in  HPSAS  to  deter  other  physicians  from  settling 
there.  Once  HPSA  designation  is withdrawn,  bonus  payments  would  cease  not  only 
for  the  newly  arrived  physicians  but  for  all  physicians  in the  HPSA. 
3
 l%e  complex  method  of establkhing  eli~bility for  incentive  payments  makes  effective 
jinancial  controk  very dificult,  leaving  lhe program  vulnerable  to  inappropriate  payments. 
Physicians  who  treat  Medicare  patients  are  responsible  for  determining  whether  they 
(the  physicians)  are  eligible  for  incentive  payments  and  for  indicating  their  eligibility  to 
their  Medicare  carriers.  They  base  their  determinations  on  information,  such  as maps 
and  instructions,  supplied  by the  carriers.  They  indicate  their  eligibility  by adding  a 
code  to  the  claim  forms  they  submit  to  the  carriers. 
There  are  many  possible  ways  for  providers  to  submit  invalid  claims,  including  both 
honest  mistakes  and  outright  fraud.  Among  the  scenarios  are: 
  Physicians  who  practice  from  locations  both  within  and  outside  HPSAS,  yet  who 
claim  bonus  payments  for  semices  delivered  from  all  locations. 
  Physicians  who  practice  in areas  that  used  to  be  HPSAS  but  whose  HPSA  status 
has  been  withdrawn. 
  Providers  of services  other  than  physicians  services  who  submit  claims  for 
incentive  payments  even  though  they  are  not  eligible. 
The  potentially  confusing  boundaries  of  HPSAS  (especially  in  urban  areas,  where 
HPSAS  may  be  defined  not  by county  but  by census  tract),  along  with  the  possibility  of 
HPSA  status  changing  from  year  to  year,  make  mistakes  likely.  For  example,  among  a 
sample  of 49 prow-ders  who  received  incentive  payments  in one  State  for  a 3-month 
period  in  1992,  7 (14  percent)  were  later  found  to  have  been  ineligible  for  the 
payments.8  The  carrier  in  that  State  had  to  contact  these.  providers  in  an  attempt  to 
have  the  money  refunded.  Although  the  claims  error  rate  for  the  entire  program  has 
declined  in recent  quarters,  problems  persist.9 
Programming  the  carriers  computers  to  detect  all  errant  claims  for  incentive  payments 
would  be  extremely  difficult  and  expensive.  The  HCFA  does  not  require  the  carriers 
to  do  so.  Instead,  the  carriers  must  annually  review  a sample  of claims  from  the 
providers  who  claim  the  most  incentive  money  and  resolve  any  discrepancies.l 
Retrospective  reviews  of samples  of  claims  may  be  sufficient  to  detect  the  most 
egregious  cases  of fraud  and  abuse.  They  may  be  insufficient,  however,  to  ensure  the 
overall  financial  integrity  of the  program. 
4
 CONCLUSION

We  believe  the  design  and  administration  of the  program  warrants  review.  The 
authorizing  legislation  for  this  program  needs  to  be  modified  to  ensure  that  it is a 
logical  mechanism  for  accomplishing  its stated  goals.  The  administrators  of the 
program,  the  Health  Care  Financing  Administration,  will  have  to  ensure  that  all  cost-
effective  measures  are  taken  to  prevent  inappropriate  disbursement  of incentive 
payment  funds. 
5
 COMMENTS  ON  THE  DRAFT  REPORT 
We  solicited  comments  on  a draft  of  this  Management  Advisory  Report  along  with  our

draft  inspection  report,  on  whether  the  bonus  payments  promote  access  to  primary

care  in  underserved  areas,  from  the  Health  Care  Financing  Administration  (HCFA),

the  Public  Health  Semite,  the  Assistant  Secretary  for  Planning  and  Evaluation

(ASPE),  the  Assistant  Secretary  for  Management  and  Budget,  the  Assistant  Secretary

for  Legislation,  and  the  Physician  Payment  Review  Commission.  We  received

comments  from  HCFA  and  ASPE.  However,  none  of the  comments  were  specific  to

this  report  so we  did  not  provide  a response  to  them  here.  We  discuss  them  fully  and

reproduce  them  verbatim  in the  final  inspection  report   Medicare  Incentive  Payments

in  Health  Professional  Shortage  Areas,   0EI-01-93-OO050,  June  1994.

6
 APPENDIX  A 
NOTES 
1.
 P.L.  100-203,  Sec.  4043;  P.L.  101-239,  Sec.  6102(c).  Forcurrent  law,  see42 
U.S.C.  13951(m).  Health  Professional  Shortage  Areas  were  originally  known  as 
Health  Manpower  Shortage  Areas  (HMSAS). 
2.  Memorandum  and  attachments  from  Edward  A.  King,  Health  Care  Financing 
Administration,  to  Stewart  Streimer,  Health  Care  Financing  Administration, 
February  22,  1993.  The  figure  of 22,000  excludes  physicians  reported  by 
Medicares  Railroad  Retirement  Board  carrier,  because  most  if not  all  of these 
physicians  are  also  reported  by the  carriers  in the  physicians  own  States. 
3.  Health  Policy  Research  Consortium,  Medicare  BCVZUSPaymenfs  ro Physicians  in 
Health  Manpower  Shortage  Areas:  Final  Report,  Cooperative  Agreement  No.  18-
C-98526/l-05,  report  prepared  for  Health  Care  Financing  Administration,  April 
1989,  p.  1:1. 
4.  The  PHS  designates  several  types  of  HPSAS.  Some  HPSAS  are  areas  with 
shortages  of dentists,  psychiatrists,  optometrists,  podiatrists,  pharmacists,  or 
veterinarians.  Some  are  population  groups  rather  than  geographic  areas. 
Medicare  incentive  payments,  however,  are  available  only  in geographic, 
primary  care  HPSAS. 
5.  42  C.F.R.  5, Appendix  A. 
6.  42  C.F.R.  5. 
7.  57  Fed.  Reg.  48919,  October  28,  1992,  and  Public  Health  Sewice,  Division  of 
Shortage  Designation,  Selected  Statistics  on  Health  Professional  Shortage 
Areas  (as  of December  31,  1992),  Table  1.  These  totals  include  geographic-
area  HPSAS  only,  not  population-group  or  facility  HPSAS. 
8.  This  State  was  one  of the  10 States  included  in a survey  of incentive  payment 
recipients  conducted  by the  Office  of Evaluation  and  Inspections,  Office  of 
Inspector  General.  For  more  information  on  the  survey,  see  Medicare 
Incentive  Payments  in Health  Professional  Shortage  Areas,  OEI-01-93-00050, 
June  1994. 
9.  Memorandum  from  Director,  Office  of Program  Operations  Procedures,  BPO, 
HCFA,  to  Associate  Regional  Administrators  for  Medicare,  June  30,  1993. 
10.  Health  Care  Financing  Administration,  Medicare  Camers Manual,  section  3350 
(revised  March  1991). 
A-1