Department of Health and Human Services 
OFFICE OF 
INSPECTOR GENERAL 
Durable Medical Equipment Regional 
Carriers 
Meeting HCFAs Objectives 
JUNE GIBBS BROWN 
Inspector General 
FEBRUARY 2000 
OEI-04-97-00330  OFFICE OF INSPECTOR GENERAL 
Public Law 95-452, as amended by Public Law 100-504, mandated the mission of the Office of 
Inspector General (OIG).  That mission 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 Atlanta Regional Office prepared this report under the direction of Jesse J. Flowers, 
Regional Inspector General, and Christopher H. Koehler, Deputy Regional Inspector General. 
Principal OEI staff included: 
Lisa Keating, Lead Analyst  Brian Ritchie, Program Analyst

Tricia Davis, Program Specialist  Bambi Straw, Program Specialist

Scott Horning, Program Analyst  Barbara Tedesco, Mathematical Statistician

Graham Rawsthorn, Team Leader  Stuart Wright, Associate Director

To obtain copies of this report, please call the Atlanta Regional Office at 404-562-7723.  Reports 
are also available on the World Wide Web at our home page address: 
http://www.dhhs.gov/progorg/oei  TABLE  OF  CONTENTS 
EXECUTIVE SUMMARY  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1

INTRODUCTION  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4

FINDINGS

Medical Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Education  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Fraud Activities  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Processing Costs  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Carrier Shopping  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Positive Results  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

RECOMMENDATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  16

COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17

APPENDIX

Comments  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
 EXECUTIVE  SUMMARY 
PURPOSE 
To determine if Durable Medical Equipment Regional Carriers met the Health Care 
Financing Administrations implementation objectives. 
BACKGROUND 
On October 1, 1993, the Health Care Financing Administration (HCFA) began using four 
Durable Medical Equipment Regional Carriers (DMERCs) to process Durable Medical 
Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) claims for Medicare 
payment.  Prior to the DMERCs, HCFA used 34 carriers to process all Part B claims, 
including those for DMEPOS. 
The change to four DMERCs was an effort by HCFA to improve ineffective and costly 
claims processing under the 34 carrier system.  Specifically, HCFA was concerned with 
ineffective education and outreach efforts, a lack of basic data for fraud prevention, a lack 
of claims processing expertise for medical equipment and supplies, a lack of standardized 
forms for claims processing, and carrier shopping by suppliers for the highest 
reimbursement rates among carriers. 
HCFA charged the DMERCs with establishing medical policies for the 100 items that had 
the highest allowed charges, developing aggressive education and fraud prevention 
programs, and reducing claims processing costs.  At the same time, HCFA required all 
Medicare carriers to use a standard claims form and changed its claims jurisdiction policy. 
HCFA designed these initiatives to reduce both administrative costs and costs to the 
Medicare Trust Fund. 
FINDINGS 
DMERCs Established Most Medical Policies as Required 
By October 1, 1993, the DMERCs were to establish medical policies defining the 
circumstances under which the 100 DMEPOS items that had the highest allowed charges 
were to be paid.  They did so for 87 of the targeted DMEPOS items.  Eight of the 
remaining policies were finalized in 1995 and two were finalized in 1997.  An additional 
two items were dropped from consideration, and a policy for the remaining item has yet to 
be developed. 
1 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  DMERCs are Providing Education as Required 
HCFA charged the DMERCs with developing an aggressive educational component, with 
the purpose of reducing incorrect claims submission, as well as reducing fraud. DMERCs 
have responded with a series of educational seminars directed at suppliers, physicians and 
beneficiaries, as well as a focused effort to educate particular suppliers that have a history 
of billing problems. 
DMERC Fraud Units Experienced Excellent Outcomes on Individual Fraud Cases, 
but Their Overall Effectiveness is Unclear 
HCFA charged the DMERCs to make a concerted effort to reduce fraud in DMEPOS 
billing and payments.  DMERCs are attacking fraud in many specific cases; however, a 
lack of complete information precluded us from determining the effectiveness of DMERC 
fraud unit activities.  While we obtained some workload data that quantifies their fraud 
efforts, the DMERCs did not provide needed data that documented the quality and result 
of their efforts. 
DMERCs Succeeded in Decreasing Claims Processing Costs 
Claims processing costs for DMEPOS claims have declined by 15 percent since the 
DMERCs were established, from $1.17 per claim in 1995 to $1.00 per claim in 1998. 
Accordingly, the DMERCs have saved an estimated $37 million per year compared to pre-
DMERC costs.  This was done largely through HCFAs initiative to standardize claims 
forms and increase use of electronic claims submission.  In addition, DMERC medical 
expertise has contributed substantially to Medicare Trust Fund savings. 
HCFAs Claims Jurisdiction Policy Stopped Carrier Shopping 
To prevent carrier shopping, HCFA dropped its point of sale billing policy and adopted a 
beneficiary residence jurisdiction policy. This action prevented suppliers from shopping for 
specific carriers that would give the most favorable reimbursement.  Under the new policy, 
carriers were predetermined, based on where the beneficiary who received DMEPOS 
lived. 
DMERC Activities Produced Positive Results 
Concurrent with implementing the activities described above, the DMERCs worked 
cooperatively with the HCFA, the Statistical Analysis Durable Medical Equipment 
Regional Carrier, the Office of Inspector General, and others to improve Medicare claims 
processing and prevent fraud, waste, and abuse.  Such cooperative efforts led to 
development and revision of various policies, and changes in claims processing practices. 
The changes in policies and practices led to financial savings in several operational areas, 
including wound care supplies, lymphedema pumps, incontinence supplies, and orthotics. 
2 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  RECOMMENDATION 
Overall, the DMERCs generally met HCFAs objectives.  However, one area of 
uncertainty is the effectiveness of their fraud units.  To facilitate measurement of fraud unit 
effectiveness, we recommend that HCFA require the DMERCs to maintain needed data in 
their automated fraud information systems.  This data should include complete and 
accurate documentation on the sources of opened cases and detailed financial information 
on fraud cases in overpayment status.  Such data would facilitate an analysis of not only 
the quantity of the fraud units efforts, but also the quality. 
COMMENTS 
The HCFA concurred with our recommendation that the DMERCs maintain additional 
data in their automated fraud information systems.  HCFA is currently developing a 
Program Integrity Management Reporting system which will require Medicare contractors 
to report data on fraud and abuse overpayments status.  The new system is scheduled for 
implementation during Fiscal Year 2000.  The full text of their comments is in appendix A. 
3 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  INTRODUCTION 
PURPOSE 
To determine if Durable Medical Equipment Regional Carriers met the Health Care 
Financing Administrations implementation objectives. 
BACKGROUND 
On October 1, 1993, the Health Care Financing Administration (HCFA) began using four 
Durable Medical Equipment Regional Carriers (DMERCs) to process Durable Medical 
Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) claims for Medicare 
payment.  Prior to the DMERCs, HCFA used 34 carriers to process all Part B claims, 
including DMEPOS.  The change to four DMERCs for processing DMEPOS claims was a 
HCFA effort to improve ineffective and costly claims processing under the 34 carrier 
system. 
Claims Processing and Payment Problems 
By the late 1980s, the number of complaints received by HCFA on processing and 
payment of DMEPOS claims had increased substantially.  The complaints were coming 
from beneficiaries, suppliers, and carriers.  Also, HCFA, the Department of Health and 
Human Services, Office of Inspector General, and the U.S. General Accounting Office 
issued numerous reports highlighting the following problems with DMEPOS claims. 
Carriers were not sufficiently educating suppliers and beneficiaries on Medicare 
requirements.  Under the 34 carrier system, suppliers often claimed to be unaware of, or 
not to understand, Medicare claims requirements.  Hence, many claims were denied for 
technical and coverage errors, which ultimately added to Medicare administrative costs 
and increased claims processing time, and effort by beneficiaries and suppliers. 
Additionally, Medicare beneficiaries were easy targets for unscrupulous DMEPOS 
suppliers.  Educating Medicare beneficiaries would help them recognize and report 
improper services and claims. 
Carriers lacked basic data for fraud prevention.  Unusual billing patterns may be the 
first indication of fraud.  Further, early discovery of billing trends allows for development 
of new or revised policies before a costly large scale problem arises.  However, DMEPOS 
claims analysis for potential fraud was difficult under the 34 Part B carrier system.  The 
carriers used their own electronic claims processing forms and systems.  Establishing 
billing patterns and trends on a large scale for identifying potential fraud was seldom done. 
4 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  Carriers lacked expertise for processing DMEPOS claims.  The 34 carriers generally 
had not developed staff expertise to efficiently and effectively review and approve 
DMEPOS claims, which were often more complicated than other Medicare Part B claims. 
In addition, DMEPOS claims comprised only about 5 percent of each carriers workload. 
Logically, Part B carriers gave low priority to them. 
Carriers used different claims forms.  HCFA determined that processing DME claims 
electronically was more cost effective than processing hard copy claims -- $2 per claim 
versus $4.1  However, the 34 carriers used over 30 different electronic claims formats. 
The multiple formats created confusion among suppliers.  Therefore, many suppliers 
submitted claims manually rather than electronically, not realizing the potential savings. 
Suppliers shopped for favorable carrier practices.  Prior to creation of DMERCs, the 
carrier responsible for claims processing was determined by where a sale took place, e.g., 
a point of sale jurisdiction policy.  However, differences existed among the 34 carriers in 
their review and approval of DMEPOS.  Reimbursement rates, quantities allowed, and 
medical policies and their enforcement varied among carriers.  This allowed national 
suppliers to manipulate the point of sale policy for excessive financial gain -- referred to as 
carrier shopping.  Carrier shopping cost the Medicare program $22 million in 1989.2 
Policy Solutions for Claims Processing Problems 
In response to the processing and payment problems of the 34 carrier system highlighted 
above, HCFA established the DMERCs as part of a larger re-engineering effort.  HCFA 
required the DMERCs to 
<	 Establish standardized medical policies for the 100 DMEPOS items that had the 
highest allowed charges, 
<  Implement comprehensive educational outreach programs,

<  Develop aggressive fraud detection and prevention programs, and

<  Improve claims processing expertise and efficiency.

To support DMERCs and improve their ability to accomplish their objectives, HCFA also 

<  Developed a standardized claims submission form, and

<  Changed the point of sale jurisdiction policy to a beneficiary residence policy.

Finally, HCFA established a Statistical Analysis Durable Medical Equipment Regional

Carrier (SADMERC) to perform large scale analysis for all four DMERCs and a National

Supplier Clearinghouse as a central issuer and repository of supplier numbers.

11989 HCFA Industrial Engineering study

2Carrier Shopping, A Management Advisory Report (OEI-05-91-00043)

5 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  Prior Studies of DMERC Operations 
The DHHS Office of Inspector General and the U.S. General Accounting Office have 
reported on DMERC operations, including payment for DMEPOS items.  Often, the 
reports depicted potential fraud, waste, and abuse.  Typically, the reports were narrowly 
focused on claims processing and payment for discrete DMEPOS items. 
METHODOLOGY 
Our report provides a big picture view on how the DMERCs have instituted changes 
HCFA deemed necessary to protect the Medicare Trust Fund and reduce administrative 
costs for claims processing.  Specifically, we determined if the DMERCs had established 
medical policies, education programs, fraud detection and prevention programs, and 
improved claims processing expertise and efficiency as required by HCFA. 
We focused our analysis on DMERC operations and data for fiscal years 1995 through 
1998.  We excluded fiscal year 1994 as it was a transition period. 
We collected data on expectations for the DMERCs and their actual operations through 
interviews, database analysis, and document searches.  To illustrate, we interviewed 
headquarters and regional HCFA staff to determine DMERC performance expectations. 
We also obtained HCFAs Contractor Accounting and Financial Management (CAFM) 
data for each DMERC.  Further, we used HCFAs Contractor Reporting of Operational 
and Workload Data (CROWD) system to obtain DMERC workload statistics. 
We made site visits to the four DMERCs.  At each DMERC, we interviewed key officials 
and staff, including the DMERC directors, medical directors, medical review staff, claims 
processing staff, fraud unit staff, and outreach staff.  In some instances, the DMERCs 
were unable to provide systemic data that we could use to measure their program 
effectiveness.  This was particularly true for the fraud control units.  In this instance, we 
used case examples and changes in workload data as an indication of performance. 
In comparing what DMERCs were expected to do with what they actually did, we 
aggregated and summarized data collected.  Our data showed wide variation in 
performance by the four DMERCs.  However, for the purposes of this report, we based 
our findings on the aggregate performance of all the DMERCs unless otherwise noted. 
We recognize that both the Statistical Analysis Durable Medical Equipment Regional 
Carrier and the National Supplier Clearinghouse could contribute to improvements in 
propriety of Medicare services and claims.  However, we limited the scope of our study to 
DMERC activities, and generally excluded other components from our analysis. 
_____  ____  ____  _____ 
We did our study between May 1997 and May 1999.  We conducted our review in 
accordance with the Quality Standards for Inspections issued by the Presidents Council 
on Integrity and Efficiency. 
6 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  FINDINGS 
Most indicators show that restructuring DMEPOS claims processing into specialized,

regional carriers was on the whole a successful effort.  The DMERCs

<  Established most of the medical policies covering the 100 mandated items,

<  Educated suppliers, beneficiaries, and others,

<  Identified and processed fraud cases,

<  Reduced claims processing costs,

<  Halted carrier shopping, and

<  Produced positive results.

DMERCs established most medical policies as required 
The medical directors established medical review policies that defined circumstances under 
which particular DMEPOS items would be allowed.  The policies are used by all 
DMERCs, thus making claims processing more uniform and reliable.  Based on the 
policies, computer edits are incorporated into automated processing systems that accept or 
reject claims, with the expectation of saving Trust Fund dollars. HCFA targeted the top 
100 codes, based on 1991 allowed charges, for DMERCS to finalize medical policies by 
October 1, 1993. 
The DMERCs finalized medical policies for 87 of the targeted 100 DMEPOS items 
by the October 1, 1993 deadline 
The DMERC medical directors established medical policies for 87 of the 100 DMEPOS 
items.  The policies were finalized and implemented by the October 1, 1993 deadline. 
Not only did the medical directors establish policies for the 87 items, they expanded the 
scope of those policies.  Foreseeing that unscrupulous suppliers may manipulate the 
system by code shifting for similar items, the medical directors established medical review 
policies for a wider spectrum of related DMEPOS items.  For example, the medical 
directors constructed an ostomy supply policy that covered relevant items from the list 
of 100 as well as other ostomy items not on the original list.  By creating this broader 
policy from the start, the directors eliminated or minimized costly code shifting that could 
have occurred had the policies been developed piecemeal. 
The DMERCs did not finalize policies for 13 of the 100 DMEPOS items by the 
October 1, 1993 deadline 
HCFA and the DMERCs discontinued using two of the 13 codes, and delayed finalizing 
policy for ten codes.  Policy for the remaining code has not yet been developed. 
7 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  HCFA discontinued using codes for two of the remaining 13 DMEPOS items. 
Because the codes were no longer used, no medical policy was needed or developed. 
HCFA and DMERCs delayed final medical policies for 10 items.  The DMERCs had 
drafted polices for 10 items prior to the October 1, 1993 deadline.  However, HCFA staff 
and the DMERC medical directors delayed finalizing the policies because of pressure from 
industry groups, suppliers, and beneficiaries who saw the policies as too restrictive. 
HCFA staff and DMERC medical directors, with input from the industry groups, finalized 
8 of the 10 policies in 1995 and the remaining 2 in 1997. 
The financial impact of the delay was minimal.  Overall, our analysis of HCFA claims data 
for the 10 DMEPOS items showed a slight net increase in allowed charges following 
policy implementation.  Allowed charges for three items decreased, but increased for the 
remaining seven items.  In effect, the increases for the seven items offset the decreases and 
produced a small net increase.  One medical director attributed some of the increase to 
expanded benefits under the codes. 
DMERCs did not develop a policy for one item.  As of February 2000, the DMERCs 
had not developed a policy for one item from the original list of 100 codes.  This item, a 
ventilator, accounted for $8.4 million in allowed charges in 1991. The allowed charges 
increased to $44.4 million in 1999. 
The DMERCs issued a Respiratory Assist Device policy in October, 1999.  Included in 
this policy were two ventilator codes.  According to a DMERC medical director, the 
specific code identified as a top 100 code in 1991 was not included as it was no longer the 
top billed ventilator code.  The two codes included in the Respiratory Assist Device policy 
had allowed charges of $152.8 million in 1999. 
DMERCs are providing education as required 
In establishing the DMERCs, HCFA required them to provide education and training, 
primarily to suppliers, physicians, and beneficiaries.  The objective was to reduce fraud 
and abuse and improve claims processing efficiency. 
HCFAs Contractor Performance Evaluations3 indicate that DMERCs consistently provide 
education.  Our analysis tended to corroborate HCFAs evaluations.  To illustrate, 
DMERC educational efforts seem to have led to increased beneficiary complaints.  This 
indicates that beneficiaries are better educated on Medicare benefits and the propriety of 
claims.  In fact, while the overall number of fraud cases that the DMERCs opened actually 
declined, the number that they opened as a result of beneficiary complaints increased from 
3HCFAs primary oversight mechanism for DMERC performance is the Contractor Performance Evaluation (CPE). 
HCFA staff evaluate the DMERCs on four criterion, each of which include ten to twelve individual activities. The criterion are 
quality (accurate claims processing and program effectiveness), efficiency (timely claims processing, electronic claims 
processing), service (accurate reviews and hearings, responsive to inquiries), and fraud and abuse (program integrity 
effectiveness). The evaluation includes some quantified measures as well as some qualitative assessments by review staff. 
8 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  7,474 in 1995 to 8,192 in 1998.  Further, the number of beneficiary calls to the OIG 
hotline regarding DMEPOS increased from 86 in 1995 to 757 in 1998. 
Education is carried out several ways.  Much of the supplier education program is carried 
out through quarterly or biannual seminars.  Topics generally include recent changes in 
policy and areas in which internal operations indicate billing problems exist.  Additionally, 
DMERC representatives have increasingly attended trade shows, participated in industry 
meetings, and visited suppliers to enhance their knowledge of supplier operations and 
products.  Further, each region produces a quarterly newsletter to suppliers.  It notifies 
them of policy changes, provides answers to supplier questions, and provides information 
on various special interest topics. 
Another important method is focused education on targeted suppliers to address individual 
billing issues.  One DMERC director reported that such targeted efforts were very 
effective.  He said that as targeted suppliers were educated, their billing problems 
declined. 
In addition, the DMERCs provide information and education to members of Congress, 
their staff, and special interest groups. 
DMERC fraud units experienced excellent outcomes on 
individual fraud cases, but their overall effectiveness is 
unclear 
To protect the Medicare Trust Fund and reduce Medicare costs, HCFA charged the 
DMERCs to make a concerted effort to reduce fraud in DMEPOS billing and payments. 
DMERCs are successfully attacking fraud in many specific cases, however, a lack of 
complete information precluded us from determining effectiveness of fraud unit activities. 
While we obtained some workload data that quantifies their fraud efforts, the DMERCs 
did not provide various other data that was needed to document the quality of their 
efforts.  For example, they all did not provide systemic data documenting proactive case 
development, or the volume and value of identified overpayments and collections.  In the 
absence of complete information for all four DMERCs, we are unable to fully evaluate 
DMERC effectiveness as a whole.  However, we do provide some insights on the three 
DMERCs that provided the necessary data. 
Individual DMERC fraud unit efforts have saved millions 
The DMERCs have assisted Federal agents from various agencies in developing fraud 
cases involving DMEPOS.  OIG agents involved in the following cases said that the 
DMERC fraud units assistance was timely and responsive. 
In one example, a DMERC assisted in an extensive undercover operation by educating 
Federal agents on claims processing and identifying problem areas in the industry.  Fraud 
9 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  unit staff identified suppliers to target.  They also posed as office workers, and helped with 
investigations of questionable suppliers. The FBI, IRS, USPS, and the OIG were involved 
in this investigation.  It resulted in five arrests for upcoding, kickbacks, mail fraud, and tax 
violations involving over $500,000. 
Another DMERC used data analysis to identify suppliers that were fraudulently billing for 
orthotics.  The DMERC fraud staff analyzed data on supplier billing, including products 
sold, referring physicians, geographic areas, beneficiaries, and sales staff.  This analysis 
linked suppliers together and identified a ring that was perpetrating fraud.  One hundred 
ninety-four suppliers are identified with the ring.  Thirty seven have been referred to other 
law enforcement organizations.  The estimated impact of the orthotics crime ring on the 
Medicare Trust Fund exceeds $87 million. 
DMERC fraud units are not proactively identifying fraud 
In establishing the four DMERCs, HCFA instructed them to use all available data to 
identify trends and patterns that might suggest fraudulent activity.  However, DMERCs 
rarely used proactive analysis to identify fraud cases. 
The significance of proactive data analysis is best reflected by HCFAs previous 
conclusion that the 34 carriers were vulnerable to fraudulent and abusive billing practices. 
With so many carriers, it was difficult for them to identify aberrant billing patterns by 
suppliers that billed multiple carriers.  According to HCFA, the consolidation of DMEPOS 
claims processing to four DMERCs would facilitate early detection of abusive and 
fraudulent billing practices through data analysis. 
Only one DMERC fraud unit used data analysis, to any significant extent, to identify 
potential fraudulent activities.  Based on fiscal year 1997 and 1998 data, this DMERC 
identified 39 percent of its fraud cases through proactive data analysis. 
By comparison, in the other two DMERCs that provided such data, only about 1 percent 
of fraud cases were opened as a result of proactive data analysis.  Although the DMERCs 
are not required to meet any numerical proactive analysis standard, we believe that 1 
percent is low.  Considering the significance of such analysis as a foundation in 
establishing the DMERCs, we would expect to see a larger proportion of fraud cases 
resulting from data analysis. 
Overpayment collection efforts are not quantified 
All investigations do not result in fraud identification and referral to the OIG.  Another 
outcome, as defined by HCFA, includes identification and recovery of Medicare 
overpayments.  Although the DMERCs provided us the number of fraud cases that 
resulted in the identification of overpayments, they did not all provide data on the total 
overpayment dollars or the extent that overpayments were collected, written off, or were 
pending.  Such information is essential for establishing the magnitude of the overpayments 
and measuring the effectiveness of DMERC fraud units. 
10 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  Workload measures indicate fraud activity 
We recognize that the workload data documents the quantity of DMERC fraud detection 
and prevention activities, but these data are inadequate for determining the quality of such 
activities.  Workload data include cases opened, closed, and referrals as shown below. 
<	 The number of cases DMERC fraud units opened declined 14 percent from 1995 
through 1998, from 15,112 to 12,975.  A case is opened for investigation of 
potential wrongdoing, and to determine if Medicare overpayments exist. 
<	 The DMERCs closed between 10,158 and 13,505 fraud cases per year.  We saw 
no consistent increasing or decreasing trend. 
<	 The DMERCs referred 1,398 cases to the OIG in 1995.  By 1998, this number had 
increased to 1,742 cases  an increase of 25 percent.  We observed that the 
number of referrals more than doubled from 1995 through 1997, reaching a high of 
3,336 referred cases in 1997 and then dropped back to 1,742 referrals in 1998. 
In addition, the DMERCs inherited a large backlog of pending fraud cases from the 34 
Part B carriers.  Working the inherited cases dominated much of the fraud units efforts in 
the initial years.  Overall, the DMERCs have reduced the number of pending cases by 9 
percent. 
DMERCs succeeded in decreasing claims processing costs 
By establishing the DMERCs, HCFA expected to reduce administrative costs. The 
DMERCs would develop needed expertise for more cost effective processing of claims. 
To aid in cutting claims processing costs, HCFA also standardized the claim form for all 
Part B services, including DMEPOS. 
DMERCs reduced claims processing cost by 15 percent from 1995 through 1998 
Nationally, the DMERC cost of processing claims decreased from $1.17 per claim in 1995 
to $1.00 in 1998 -- a 15 percent reduction in unit cost per claim over the 4 year period. 
During the same time period, the volume of claims processed increased nearly 20 percent. 
The claims processing costs and workload were not uniform among the DMERCs.  Each 
of the four DMERCs achieved a decline in the cost of claims processing since 1995. 
However, the cost of claims processing and workload varied widely among the four 
DMERCs.  To illustrate, in 1995 the cost ranged from $1.00 per claim in one DMERC to 
$1.38 in another DMERC.  In 1998 the cost ranged from $0.89 per claim in one DMERC 
to $1.12 in another.  Table 1 shows cost per claim processed and workload statistics for 
each DMERC for fiscal year 1995 through fiscal year 1998. 
11 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  TABLE 1 
CLAIMS PROCESSING WORKLOAD AND COSTS4 
FY 1995  FY 1996  FY 1997  FY 1998 
Region  Claims  Unit Cost  Claims  Unit Cost  Claims  Unit Cost  Claims  Unit Cost 
A  7,363,555  $1.14  7,546,380  $1.05  7,909,635  $0.93  7,728,909  $0.98 
B  8,291,664  $1.38  8,775,683  $1.28  9,464,583  $1.23  9,809,398  $1.11 
C  14,255,413  $1.00  15,513,246  $1.06  16,615,815  $0.94  17,904,946  $0.89 
D  6,865,857  $1.31  7,346,080  $1.31  7,927,125  $1.12  8,242,774  $1.12 
Total  36,776,489  $1.17  39,481,389  $1.14  41,917,158  $1.04  43,686,027  $1.00 
Decreased claims processing costs resulted in annual estimated savings of $37 
million 
HCFA reported that prior to establishing the DMERCs, DME claims processing costs 
were $2 for electronic claims and $4 for hard copy claims.  In 1998, HCFA reported that 
DMERC claims processing unit cost for DMEPOS averaged $1.00 per claim. This 
includes cost for both electronic and manual processing. 
To provide a conservative estimate on potential savings in claims processing, we 
compared the DMERC claims processing cost for DMEPOS to the cost of  processing 
DME claims electronically prior to establishing the DMERCs.  To illustrate, we compared 
the 1998 DMERC claims processing cost of $1 (see Table 1) to the $2 cost of processing 
DME claims electronically prior to establishing the DMERCs.  Our comparison showed a 
conservative savings estimate of almost $44 million for the nearly 44 million claims (see 
Table 1) processed in 1998. 
Similarly, we calculated estimated annual savings for 1995, 1996, and 1997.  Table 2 
shows that estimated savings steadily increased from about $30 million in 1995 to about 
$44 million in 1998.  The average annual savings was about $37 million. 
TABLE 2 
ESTIMATED CLAIMS PROCESSING SAVINGS 
Region  FY 1995 Estimated  FY 1996 Estimated  FY 1997 Estimated  FY 1998 Estimated 
Savings  Savings  Savings  Savings 
A  $6,332,657  $7,169,061  $8,463,309  $7,883,487 
B  $5,140,832  $6,318,491  $7,287,728  $8,730,364 
C  $14,255,413  $14,582,451  $17,612,763  $19,874,490 
D  $4,737,441  $5,068,795  $6,975,870  $7,253,641 
Total  $30,466,343  $33,138,798  $40,339,670  $43,741,982 
4Data extracted from HCFAs Contractor Accounting and Financial Management system. 
12 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  Standardization of claim forms was an important factor in decreasing claims 
processing costs 
Logically, many factors could have contributed to claims processing cost reductions.  For 
example, staff expertise, economies of scale, supplier and beneficiary populations and 
management practices may all contribute to declining costs.  Such factors are typically so 
intertwined and co-dependant that segregating and quantifying their individual impacts 
was not feasible or desirable given the objectives and scope of this study.  However, 
HCFA and DMERC officials highlighted standardization of claims forms as a major 
contributor to the cost reductions. 
HCFA officials said that a lack of standard claims forms was a major influence on the high 
cost of processing claims prior to establishing the four DMERCs.  To illustrate, before the 
DMERCs, the 34 Part B carriers used their own claims processing forms.  According to 
HCFA officials, the multiple electronic forms used by the carriers discouraged many 
suppliers from submitting claims electronically. 
Therefore, concurrent with establishing the DMERCs, the HCFA established a 
requirement that all Part B carriers use a standard claims processing form.  According to 
HCFA and DMERC staff, the standardized form streamlined claims processing, and 
therefore reduced processing costs. 
According to HCFA data on the 34 carriers, the cost of processing electronically 
submitted DME claims was half that of processing hard copy claims -- $2 versus $4.  The 
cost of processing DMEPOS claims is even less under the DMERC system.  As shown in 
Table 1, consolidating both electronic claims processing and hard copy claims processing, 
the cost per claim was about $1 in 1998 - a substantial reduction over the 34 carrier 
system. 
HCFAs claims jurisdiction policy stopped carrier shopping 
In establishing the DMERC system, HCFA dropped its point of sale billing policy and 
adopted a beneficiary residence claims jurisdiction policy to resolve carrier shopping 
problems.  Under the point of sale policy, a carrier that processed any given DMEPOS 
claim was identified as the carrier with jurisdiction where the sale took place. 
Under this policy, suppliers could control which carrier would pay their claims.  They 
could shop for the carrier with the most favorable reimbursement, review, and payment 
policy, then establish a billing office in the jurisdiction of the carrier that offered the most 
favorable reimbursement. 
By changing to a beneficiary residence jurisdiction policy, HCFA prevented suppliers from 
determining who would pay the claim.  This proactive effort closed the loophole that had 
allowed abusive billing activities.  Suppliers could no longer shop for the most profitable 
reimbursement because carriers were predetermined, based on where the beneficiary who 
received DMEPOS lived. 
13 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  Our analysis showed that 1998 claims were processed by the appropriate DMERC.  We 
reviewed a sample of claims to determine if more than one DMERC had paid different 
claims for the same beneficiary.  The extent that claims for the same beneficiary are paid 
by different DMERCs would suggest the size of the carrier shopping problem, however, 
the absence of this does not definitively rule out carrier shopping.  If carrier shopping 
continued to exist, we would expect to see a higher percentage of claims paid by two or 
more DMERCs.  We determined that only 0.39 percent of beneficiaries had claims 
processed by two different DMERCs.  This may be explained by the snowbird 
populations that maintained residences in different regions and the beneficiaries who 
moved during the year. 
DMERC activities produced positive results 
Concurrent with implementing the activities described above, the DMERCs worked 
cooperatively with the HCFA, the Statistical Analysis Durable Medical Equipment 
Regional Carrier, the Office of Inspector General, and others to improve Medicare claims 
processing and prevent fraud, waste, and abuse.  Such cooperative efforts led to 
development and revision of various policies, and changes in claims processing practices. 
The net effect of such DMERC activities produced important Medicare Part B claims 
processing improvements--leading to considerable savings to the Medicare Trust Fund. 
To illustrate, DMERC data analysis, in conjunction with SADMERC analysis, has led to 
several medical policy revisions.  These revisions resulted in substantial savings to the 
Medicare Trust Fund.  For example, we reported that implementation of the October 1995 
DMERC wound care supply policy resulted in savings of $58 million in 1996.5 
In another example, we reported Medicare savings of $76.2 million in the allowance for 
lymphedema pumps in 1996.6  These savings were a result of a concerted OIG, HCFA, 
and DMERC effort to curb abusive billings for lymphedema pumps.  The DMERC 
medical directors revised the lymphedema policy in December 1995, and monitored its 
implementation by examining claims to ensure appropriate payments. 
DMERCs have also partnered with HCFA, OIG, and other law enforcement agencies to 
produce payment and coverage policies, fraud alerts, reports, and prosecutions.  Such 
efforts contributed to declines in Medicare allowances.  In 1997 we reported that about 
$49 million was recovered through seizures and restitutions from abusive incontinence 
suppliers.7  Additionally, DMERC medical policy revisions made billing for questionable 
supplies more difficult.  We estimated that declines in questionable billings saved the 
Medicare program $85 million in 1995. 
5 Medicare Part B Allowances for Wound Care Supplies (OEI-03-94-00793) 
6Medicare Allowances for Lymphedema Pumps (OEI-04-97-00130) 
7Medicare Allowances for Incontinence Supplies (OEI-03-94-00773) 
14 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  Finally, 1991 Medicare payments for non-legitimate orthotics devices exceeded $7 
million.8  Subsequent to this identified problem, the DMERCs were established and 
implemented an orthotics policy.  We conducted a follow-up review and concluded that 
the DMERCs implementation of the policy had precluded continued payments for non-
legitimate orthotics.9 
We presented the above examples not as an exhaustive list of the DMERCs 
accomplishments, but rather to illustrate the substantial role DMERCs have played in 
saving the Medicare program millions of dollars. 
8Medicare Payments for Orthotic Body Jackets (OEI-04-92-01080) 
9Medicare Payments for Orthotic Body Jackets (OEI-04-97-00390) 
15 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  RECOMMENDATION 
Although HCFAs establishment of the DMERCs has generally been a success and 
resulted in program efficiencies and financial savings, we identified an opportunity for 
improvement.  Specifically, HCFA should require the DMERCs to maintain additional 
data in their automated fraud information systems.  This additional data should include 
complete and accurate data documenting 
<  The sources of opened cases (i.e., proactive data analysis, medical review 
referrals), and 
<  Detailed financial information on fraud cases in overpayment status (i.e., how 
much was collected, is pending, and was determined uncollectible). 
Such data would facilitate an analysis of not only the quantity of the fraud units efforts, 
but also the quality. 
16 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  AGENCY  COMMENTS 
The HCFA concurred with our recommendation that the DMERCs maintain additional 
data in their automated fraud information systems.  HCFA is currently developing a 
Program Integrity Management Reporting system which will require Medicare contractors 
to report data on fraud and abuse overpayments status.  The new system is scheduled for 
implementation during Fiscal Year 2000.  The full text of their comments is in appendix A. 
17 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330  APPENDIX A 
18 
DMERCs - Meeting HCFAs Objectives  OEI-04-97-00330